From the Mises.org blog:

A small set of ideas does most of the heavy lifting in economics. “Ten Principles of Economics” or “Ten Big Ideas” or “Ten Key Elements of Economics” are pretty standard in most introductory economics books. Here’s my version, based on Chapter 1 of The Economic Way of Thinking.

1. People Act. People choose goals (ends), and they choose ways to achieve those goals (means). One of your goals, presumably, is to obtain a well-rounded liberal education. Taking econ 100 is one of the means you have chosen to that end. This also implies subsidiary means-ends relationships. Suppose one of your goals is “pass econ 100.” Reading the textbook, doing the assignments, coming to class, visiting office hours, and visiting the peer tutor are means to that end.

2. Every Action Has a Cost. When you do one thing, you give up the opportunity to do another. For example, you have an almost limitless range of options right now. You could be eating, sleeping, working, or chatting with your friends, but you have chosen instead to read this assignment. Your next best alternative is the cost you have incurred in order to read the assignment. If preparing for the first class takes five hours and your next best alternative is working for $8 per hour, then preparing for class has cost you the opportunity to earn $40 (we will shorten this periodically and say that “preparing for class” cost you $40). You will also hear people say “there is no such thing as a free lunch,” and indeed, free stuff isn’t free. If you spend thirty minutes in line waiting for a slice of free pizza and your next best alternative would be working for $8 per hour, then that slice of pizza has cost you the opportunity to earn $4.

3. People Respond to Incentives. Incentives motivate people to action. People will do more of something as the cost falls, and they will do less of it as the cost rises (the law of demand). Similarly, they will try to supply more of something that gets more remunerative and less of something that gets less remunerative (the law of supply). Prices are some of the most important incentives in economics. The price is the number of dollars that have to be traded for something ($2 for a cup of coffee, for example). Market prices emerge from the interactions of buyers and sellers.

4. People make decisions at the margin. People make trade-offs. Economic analysis is incremental: when people make decisions, they compare the costs and benefits of a little bit more or a little bit less of something. You don’t usually make sweeping categorical decisions about what is good or what is bad. You generally won’t decide that studying economics is Always Good (otherwise, you would study economics 24 hours a day) or Always Bad (otherwise, you would not study economics at all). You will compare, for example, the cost of an additional evening spent studying physics to the benefit of and additional evening studying economics. Generally, people will do everything for which the marginal benefit exceeds the marginal cost and nothing for which the marginal cost exceeds the marginal benefit. The decisions you should make ultimately depend on your goals and values. Economics as such cannot tell you whether you should spend the next minute, the next hour, or the next day studying economics, studying physics, updating your Facebook page, or sleeping, but it can tell you that you’re making a trade-off.

5. Trade makes people better off. Trade is a kind of voluntary cooperation, and it makes us wealthier. This happens in two ways. First, we know that since people act, they will only do things if they expect it to make them better off. If you trade $100 for a ticket to see the Jonas Brothers and Hannah Montana, we infer that it is because you expect to prefer the concert to anything else you could have done with the $100. This is not to say that people won’t make mistakes from time to time—we have all rented a terrible movie or ordered something at a restaurant that we didn’t like—but in general, trade will make us better off. The second way trade makes us better off is by increasing our productivity. According to the law of comparative advantage, when people specialize and trade, they can produce more output with the same inputs. Similarly, they can produce the same outputs with fewer inputs. In either case, people have more resources with which to attain their goals. This has an important implication that echoes a thought originally expressed by Adam Smith: people are more likely to help you achieve your goals if you help them achieve theirs.

6. People are Rational. This is a lot more controversial than it should be. When we say that people are rational, we mean that they will tend to do things that they expect to provide them with net benefits. We don’t mean that they will always make the right decision, that they have complete information, or that they will never make mistakes. We mean that they have goals, they tend to choose the means that they believe are appropriate to achieve them, they respond to incentives, and they learn from mistakes.

7. Using markets is costly, but using government can be costlier still. Transaction costs are the costs of measuring the valuable attributes of goods and services as well as the costs of specifying and enforcing contracts. Since trade is costly, there may be situations in which people do not make trades that would have made them better off. In principle, governments can correct these “market failures.” However, people working for the government respond to incentives, as well. Government policies like price controls, taxes, and subsidies also prevent people from making trades. Because of the incentives they face, government actors often have incentives to make things worse whether they intend to do so or not.

8. Profits tell businesses that they are helping others, while losses tell businesses that they are wasting resources. When private property rights are secure, profits and losses are the market’s feedback mechanism. You earn profits by providing people with goods and services they want at prices they find attractive. You earn losses when you provide people with goods and services they don’t want at prices they find unattractive. The invisible hand of the marketplace will tend to weed out businesses that make people worse off: it tells these businesses that the resources they are using could be better used in another enterprise. Resources will tend to flow of out of enterprises that are unprofitable and toward enterprises that are profitable.

9. We shouldn’t ignore the long-term and unintended consequences of policies and actions. Careful economic analysis is, in part, the process of asking “and then what?” about any policy or action. In his book Applied Economics, Thomas Sowell calls this “thinking past stage one,” and in his classic Economics in One Lesson, Henry Hazlitt defined “the art of economics” as tracing the effects of actions and policies and seeing how they affect everyone rather than just particular groups. The Economic Way of Thinking defines economics as “a theory of choice and its unintended consequences,” and indeed, most applied economic analysis consists of isolating and exploring the unintended consequences—whether they are good or bad—of actions and policies.

This is the introduction from a recent piece I wrote for Ausnomics.

"When the gates are all down and the signals are flashing the whistle is screaming in vain; and you stay on the tracks ignoring the facts well you can't blame the wreck on the train," Don McLean, Can’t Blame The Wreck on The Train

We recently attended a lecture on the global crisis by Nobel Laureate Joseph Stiglitz and were left shaking our heads in dismay at the state of the economics profession. In between attacks on his (straw man) interpretation of capitalism and the free market were the usual Keynesian cries for global stimulus to support 'aggregate demand' (capital is homogenous after all, right?); income redistribution to reduce savings and boost consumption; more regulation; a tax on countries that save too much (Germany); and a conclusion implying that the ideal solution would be for a global government with a global fiat currency with the 'right people' (Stiglitz) in charge. Only then can we abolish scarcity and live out our days in a wonderful Keynesian utopia!

Now, Stiglitz did manage to dedicate a small part of his talk (about 2 minutes out of 90) to Australia and the response of the government to the crisis – what he described as a "best in the world," well structured and timely stimulus package that worked to save Australia from depression. We are of a differing opinion and believe that while the stimulus probably did keep Australia out of statistical recession for the time being (when looking at aggregate GDP numbers), it means the eventual bust will be all the more painful.

The truth is that Australia is not different. Australia is neither special nor smarter than everyone else and the property bubbles that have burst in other countries will burst in Australia as well. The dream world that people like Stiglitz live in – one with a strict focus on aggregate demand – leads them to believe that all we need is enough government spending, regulation and income redistribution for everything to be hunky-dory. If only it were so easy. Unfortunately, back in the real world, the Australian government that gloats about how it "…successfully navigated their country through the biggest economic downturn in 75 years," must face the laws of economic science and no matter how much you say, wish or hope to the contrary, economic reality will eventually bite; and bite hard it will.

I don't frequent Steven Keen's blog very often but I happened to have a look today to see his thoughts on the recent falls in house prices, lending and unemployment only to be immediately reminded as to why I generally keep away. In his post, Bank Profits a sign of economic sickness, not health, Keen states that:

"...banks make money by creating debt, and the amount of debt we've been enticed into taking on is the sign of a sick economy rather than a healthy one."

Fair enough: banks do make money by loaning out funds they have acquired through deposits (and some thanks to our fractional reserve fiat currency system), but to conclude from this that the economy is sick is false. This debt is private and there is nothing wrong with private debt in a healthy economy. It is the same as any trade on a free market, both parties benefit and no one loses (otherwise why would the transaction take place, right?). However, if we take a deeper analysis, to ask "why" private debt is so high - don't get me wrong, the economy is absolutely sick, but this is just another example of Keen drawing the correct conclusion from incorrect reasoning and thus coming up with harmful policy prescriptions - we would see that it is the banks' ability to lend far above the amount of currency it stores in deposits, along with various government schemes (the moral hazard of deposit guarantees; wholesale funding guarantees; or at the worst case a full bailout) that causes private debt to reach levels well above what it would be on a free market. If you were a banker staring at a transaction that has been manipulated by these factors (and there are many more!), factors that have made money 'cheap' AND you are relatively insulated from all possible negative side effects - of course you are going to expand the money supply and provide cheap loans for housing speculation. Who wouldn't?

What I am trying to say is that the only reason private debt was able to get so far out of hand is because of government meddling in the market. Credit that is unbacked by growth in real savings is then issued by the banks which gets funneled into the share market and housing speculation, two things that Keen so despises. It is when this credit expansion is reversed that we see a crisis, not when, as Keen puts it, "...both workers and capitalists suffer as bank income goes through the roof—leading to a Depression."

Rising bank income and falling worker income is merely a symptom not a cause of the crisis.

Keen finishes with:

"This is the real debt story of our economy right now. As the first chart above indicates, private debt is far higher than Government debt, even after the increase last year due to Rudd’s stimulus package. Government debt is currently 5.5% of GDP, whereas private debt—even though it has fallen slightly due to business deleveraging—is over 150% of GDP: 27 times the size of Government debt. The so-called debate that the major parties are having over the size of Government debt is an embarrassment."

This is where Keen's true colours show. By only seeing a symptom - the 'evil' bankers pushing credit - he misses the real culprit, the government who enabled this to happen in the first place and bails out the bankers. Ironically, this is the same entity that he forgives for having debt of their own and no doubt will call upon to fix the 'private debt crisis' through regulation, profit taxes, price controls and so on!

Finally, just because private debt is "27 times the size of government debt," that does not mean people correctly questioning the size of the debt are an "embarrassment." On the contrary, public debt is very different from private debt. Instead of a normal free market transaction between a creditor with a low time preference exchanging money with a high time preference debtor, the government offers to pay back the creditor through the taxpayer via taxes or inflation. Public debt is dangerous no matter how much interest the government is paying on it or how large it is: all government spending diverts resources out of the private sector towards areas determined by bureaucrats. While private debt creates wealth (aside from when the government manipulates the interest rate and other factors and leads them to err, as we see with the housing bubble), public debt merely destroys it (and crowds out the private sector in the process).

It's not the debate on government debt but Keen's dismissal of the government's debt that's the embarrassment.

I thought this economically illiterate movement had died in the 1970s. Obviously not:

"Thousands of people have gathered around Australia calling for better pay for women working in the community sector.

ASU secretary for New South Wales Sally McManus says the issue is now the subject of a historic test case being lodged with Fair Work Australia. She says women's work is not being properly valued, with pay 18 per cent less than the average pay for men, which puts the gap at the same level it was in 1972." Source.

What I do not get is if women are paid 18 percent less than men for equal work, would it not be in the interest for employers to fire their male employees and hire females to replace them? If, as they claim, they are doing equal work, then this would be a great way to increase profits. After all, is that not all the evil capitalist pigs care about?

The fact of the matter is that women who are paid less do not do equal work to men. They often take jobs that are more flexible, knowing that they will have to take time off to have a child at some point down the road. Employers also factor in maternity leave and the cost of finding a replacement during this time when deciding whom to employ and what wages to offer. Then you also have a disproportionately large number of women competing for the same, flexible jobs, driving down wages in those industries. Comparing wages between the sexes is apples and oranges. Any legislation which, as Sally McManus wants, 'values' women's labour correctly (translation: arbitrarily/politically), will have disastrous consequences for business and employment as measures such as this always do.

...at least that is what the mainstream pundits would say. To me it looks like just another example of malinvestment and why we should not get too carried away with the 'centrally planned miracle' that is China. From the China Youth Daily (sourced at Sinocism), here's a clip:

Although the welfare housing system has been ordered stopped, the covert housing welfare that exists for government employees has not stopped, and has become its own system. Some central government offices in Beijing not only have ample financial resources for housing welfare, but their prices are not even 20% of the market prices. And not only can local officials get a share of ownership in existing houses/property, but they even build new houses in the name of renovation and housing reform...

Housing is meant to be a one of the basic necessities of life, but at present it has become a very common problem. If the people want to realize their dream of having housing, they must count on the government to move. If government employees could feel the pain caused by these housing problems, that would give them the impetus to do something. But housing welfare for government employees is widespread, and it allows them to distance themselves from the housing market. Whether housing prices are high or low has little effect on their housing, so we must take useful steps to get them to do something. We can’t rely on their senses of responsibility or their consciences.

If the law has banned it, but civic organs are doing it openly, then that is public corruption! This kind of corruption not only destroys the government’s incentive to regulate the housing market, it gives government employees a vested interest in the continued rising of housing prices. Because government employees can get houses easily, the value and profit potential of their property increases as the amount of property they have goes up.

As Smith said in the Wealth of Nations (I.ii.2: pp 26-27), "...it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages." The same cannot be said for politics. Under economic competition, people compete (earn economic profit) by best serving the consumer. By contrast, the worst tend rise to the top of the political ladder as there is a tendency for these people to both desire power and be effective at using it. Under political competition, politicians compete (earn political profit) by supplying wealth transfers to interest groups through legislation and regulation. This is what we are seeing in the Chinese housing industry and I have no doubt that there are countless examples littered throughout their economy.

Just another red flag...

I've uploaded an excellent paper by Edward Chancellor which highlights concerns that I and a lot of others are having about China. Given the close ties China has to the Australian economy and how dependent we are on Chinese demand for our natural resources, a downturn in China would spell disaster for our "lucky country."

In Australia, interest rates are still almost as low as they have ever been historically and the next move is going to be up. Even if we drop into crisis mode and Stevens the Keynesian in charge of the RBA slashes rates again, we may just get a US/Japan style situation where banks keep loans "performing" by lowering the borrower's rate to almost nothing and just require interest-only payments (still making a small profit on the spread) to stay in business (no hit to capital). That's all hunky dory but they certainly won't be making loans to businesses or any other private parties so the economy will just stagnate. We will end up excessive government debt and our mighty four-pillar banks reduced to zombies.

Back to the article, I especially like the Mills quote from 1867, "Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal in hopelessly unproductive works," which is exactly why bailouts do nothing to help the poor taxpayer or 'economy' but merely transfer wealth from them to the politicians buddies (large campaign contributors, former colleagues, etc).

Malinvestment is certainly rife in China as it always is under central planning. Resources are allocated sub-optimally and often arbitrarily by planners which may make for a great GDP figure but can hardly be called wealth creation when individuals don't actually want it. They have papered over the cracks with massive monetary inflation over the past few years which makes these (mal)investments look better than they actually are, but as Hayek said that can only be maintained with an ever-increasing rate of inflation. Thus, the income bonuses Australia has received over the past decade from the unsustainable natural resource demand in China are exactly that, unsustainable. They are being driven by monetary inflation and bank credit expansion. Malinvestment is rife and, as the article states, there are red flags everywhere.

As is always the case with bubbles, the hardest thing to predict is the timing. Take for instance the data: recall the Soviets boasting about their excellent 'free' healthcare system. Each hospital was allowed a certain number of deaths per annum and doctors were rewarded based not on profit or how well they treated their customers but on death statistics. So doctors did what they had to to avoid punishment: they would either fudge the statistics; refuse to treat people near death; and sometimes would simply wheel existing patients out the doors if they looked like dying. While the context and severity is different, a Chinese banker would be faced with a similar situation: choose between recording a 'death' in a loan or manipulate the data for as long as possible. The whole process can take a very long time to unravel and reveal the true state of the country and how much malinvestment really exists.

Unfortunately, Australia is tethered to the ship that is China and if she goes down we're going down with her, unless of course something else doesn't sink us before then (as the article mentions, when you have a state-run economy you can delay the inevitable for an unbelievably long time). When this happens government and businesses that have been relying on high commodity prices and demand from China will suffer. Governments find it very very very difficult to cut spending when revenue falls and thus this will result in an expansion in the unproductive government sector relative to the whole economy. We might be in deficit for some time to come.

Click here to download China's Red Flags, a March 2010 GMO White Paper by Edward Chancellor.

It seems overpopulation is scaring everyone and politicians, not being ones to miss an opportunity to target and exploit the fears of the populace, are calling for an enquiry into our population to examine the "...environmental, social and economic sustainability of Australia's population and report back by July 1, 2011, after the next election."

Now a lot of the concerns being raised are about things such as water, electricity, transport infrastructure and so on running out - utilities that are currently owned/managed/operated/regulated by the state. This is indeed a problem and if this is allowed to continue along with the forecast population increase then we will get more water rations, more power outages and more congestion on our roads. But before we start panicking and respond with some knee-jerk anti-birth or anti-immigration policy, we need to ask ourselves: why? Shortages, congestion and rationing, for some reason, never occur in the private sector yet are inevitable when the public sector is in charge. For a crude example, when was the last time you saw bottled water being rationed out at the supermarket? The reason why this problem is isolated to the public sector is that if there is an increased demand for a good in the private sector, consumers are willing to pay more for the product and investors invest more in its supply or in alternatives, thus clearing the market to everyone's satisfaction. In the meantime, while investors and entrepreneurs come up with new solutions to solve said problems, higher prices ensure that the available resources are allocated to their most urgent uses. In the public sector, on the contrary, an increased demand for a good (e.g. water) will result in complaints about how we are wasting precious resources, rationing, queues and higher taxes to "solve" these "issues of national significance."

With my little rant on public ownership of goods out of the way, I'm going to borrow from the late economist Julian Simon who throughout his career was generally optimistic about the benefits humans bring to the planet and about man's prospects for the future. He felt that overpopulation wasn't something that we had to worry about; his future outlook was that "...first, humanity's condition will improve in just about every material way. Second, humans will continue to sit around complaining about everything getting worse." How true.

Simon's central premise was that people are the ultimate resource, "...human beings are not just more mouths to feed, but are productive and inventive minds that help find creative solutions to man's problems, thus leaving us better off over the long run." He argued that mankind would rise to any challenges and problems by devising new technologies to not only cope, but thrive. "Whatever the rate of population growth is, historically it has been that the food supply increases at least as fast, if not faster."

To solve the 'problem' of overpopulation, we merely need to unleash the ingenuity of mankind - through the mechanism that is the unfettered market - and enjoy the marvels of human achievement in their fullest. 

So with that said, here’s a lengthy quote from Simon's book, The Ultimate Resource:

"A conceptual quantity is not finite or infinite in itself. Rather, it is finite or infinite if you make it so–by your own definitions. If you define the subject of discussion suitably, and sufficiently closely so that it can be counted, then it is finite–for example, the money in your wallet or the socks in your top drawer. But without sufficient definition the subject is not finite–for example, the thoughts in your head, the strength of your wish to go to Turkey, your dog's love for you, the number of points in a one-inch line. You can, of course, develop definitions that will make these quantities finite, which shows that the finiteness inheres in you and your definitions rather than in the money, love or one-inch line themselves. There is no necessity either in logic or in historical trends to state that the supply of any given resource is "finite," and to do so leads to error.

Someone coined the label "cornucopians" for those who believe that the natural resources are available in practically limitless abundance, to contrast with "doomsters." But the stream of thought that I represent here is not cornucopian. I do not suggest that nature is limitlessly bountiful. Rather, I suggest that the possibilities in the world are sufficiently great so that with the present state of knowledge–even without the additional knowledge that human imagination and human enterprise will surely develop in the future–we and our descendants can manipulate the elements in such fashion that we can have all the raw materials that we desire at prices ever smaller relative to other goods and to our total incomes. In short, our cornucopia is the human mind and heart, and not a Santa Claus natural environment. So has it been throughout history, and therefore so is it likely to be in the future."

There's a great (and short!) video online on why profit is so important for a well functioning price system and economy.

Tom Woods (author of Meltdown) has an excellent article up at lewrockwell.com which succinctly demonstrates why it is not the free market that is to blame for the crisis but rather the government and central bank - the very institutions that are being hailed as our saviours. It is my view that the 'fool's paradise' that is Australia will be exposed for what it is at some point this year and this article explains in part why (in particular read the part about Greenspan and the 2001 U.S. recession). Here is Woods's summary of Hayek's point on why we have boom-bust cycles:

Scenario 1 [housing expansion on a free market]. Consider what happens when the public increases its savings. Since banks now have more funds to lend (namely, the saved funds deposited by the public), the rate of interest it charges on loans will fall. The lower interest rates, in turn, stimulate an expansion in long-term investment projects, which are more sensitive to interest rates than short-term projects are. (Think of the difference in the decline in monthly payments that would occur between a 30-year mortgage and a 1-year mortgage if interest rates came down by even 2 percentage points.)

Lower-order stages of production are those stages closest to finished consumer goods: retail stores, services, and the like. Wholesale and marketing are examples of higher-order stages. Mining, construction, and research and development are of still higher order, since they are so remote from the finished good that reaches the consumer. When people’s consumption spending contracts, it is a perfect time for higher-order stages of production to expand: because of people’s additional saving, there is relatively less demand for consumer goods, and the resulting contraction of lower-order stages of production will release resources for use in the higher-order stages.

Scenario 2 [housing expansion with artificially manipulated fiat currency]. Government-established central banks have various means at their disposal to force interest rates lower even without any corresponding increase in saving by the public. Just as in the case in which public saving has increased, the lower interest rates spur expansion in higher-order stages of production.

The difference, though, is a critical one and guarantees that these artificially low interest rates will not yield the happy outcome we saw in Scenario 1. For in this case, people have not decreased their consumption spending. If anything, the low interest rates encourage further consumption. If consumption spending is not constricted, the lower-order stages of production do not contract. And if they do not contract, they do not release resources for use in the higher-order stages of production. Instead of harmonious economic development, there will instead ensue a tug of war for those resources between the higher and lower stages. In the process of this tug of war, the prices of those resources (labor, trucking services, et cetera) will be bid up, thereby threatening the profitability of higher-order projects that were begun without the expectation of this increase in costs.

As the workers in the newly expanded higher-order stages of production begin to spend their incomes, they spend according to the same saving-to-consumption ratio they did in the past. Their desire to save, and thereby to sustain all this long-term investment, turns out to be not as great as the distorted structure of interest rates led entrepreneurs to believe. It becomes ever clearer that society is not prepared to support the expansion of time-consuming higher-order stages of production. They do not wish to save enough resources to make the completion of all the new projects possible. The lower-order stages will win the tug of war. Expansion in the higher-order stages will have to be abandoned. Some of the resources deployed there will be salvageable; others will have been squandered forever or will be of little to no use in later stages of production.

I suggest reading the whole article - there is a great quote near the end on why regulation cannot fix banking from Guido Hülsmann's The Ethics of Money Production.

I feel I have to highlight one of the rare moments when the unseen consequences of governmental manipulation of markets becomes seen:

ENVIRONMENT Minister Peter Garrett will keep his job but thousands of workers will be sacked after the abrupt scrapping of the disastrous $2.5 billion household insulation scheme yesterday.

And Mr Garrett's own department admitted that as many as 80,000 homes across the country may have been left with insulation that does not comply with the official guidelines. Source

We know that when the government distorts the price system through, for example, incentives such as insulation subsidies or grants, the higher prices - which indicate to people where the most urgent shortages as dictated by true consumer preferences currently are - lure entrepreneurs and workers like moths to a flame into that industry. When the program ends, these people are suddenly not needed - they were employed in an area not aligned with consumer preferences. We will have thousands of unemployed insulation installers who might have become plumbers or gardeners or something else actually aligned with the true demands of consumers.

The failure of this program comes as no surprise to anyone who has read Bastiat's What Is Seen and What Is Unseen but 90 per cent of the time the majority of the voting population never look beyond what is seen. It's unfortunate that it took the loss of human life to expose it this time (another unfortunate consequence these programs have a habit of causing) - no doubt the government will be calling for more money, better people and better regulation to 'get it right' the next time.

Let me begin by saying that I still think the science that suggests anthropogenic carbon emissions are the major cause of climate change is anything but settled. Given the unpredictable nature of the climate and all the scandals involving the IPCC and other government-funded climate science bodies we would be foolish not to maintain some caution; I certainly don’t think we should be rushing into anything that could adversely affect the living standards of many, many people. However – and this is a dilemma I’ve had for a while – it seems both political parties are set on “action”, so the billion dollar question is: which path will cause less damage?

“Personally, I find that the most objectionable feature of the conservative attitude is its propensity to reject well-substantiated new knowledge because it dislikes some of the consequences which seem to follow from it—or, to put it bluntly, its obscurantism. I will not deny that scientists as much as others are given to fads and fashions and that we have much reason to be cautious in accepting the conclusions that they draw from their latest theories. But the reasons for our reluctance must themselves be rational and must be kept separate from our regret that the new theories upset our cherished beliefs” – F.A. Hayek

First, apologies if I have the details of either policy a bit muddled; I honestly haven’t had the time to trawl through them so there might be some parts I have wrong, please correct me if that’s the case. With that said, first up on the chopping block is Labour’s Emissions Trading Scheme.

• Schemes of this nature have enormous administrative costs
• Government allocates emission permits sector by sector, industry by industry
• Government auctioning permits for businesses to continue to do business is a huge tax hidden in a bureaucratic black box
• The government has even more power to pick winners and losers, all of whom will no doubt commit huge amounts of capital to lobbyists to influence the government

Now as someone who is generally very sceptical about giving the government any new authority, I could certainly see how billions of dollars could go “missing” under this scheme. At face value, while it will cut carbon, it will expand bureaucracy and crony-capitalism to even further heights.

As for the Liberal’s “direct” approach, again correct me if I’m wrong, but it looks like, quite simply, “$10b worth of handouts for businesses and farmers to reduce emissions.” As with the above – although this may be more transparent and cost less – it’s almost a certainty that the creation of a new body to simply hand out cash for farmers to plant trees and so forth will reek of pork barrelling and waste. I’ll examine it a bit more in the coming days (honestly, I really don’t have the time – this entire post is being rushed, mainly so I can get the following point out. I will comment on this post at a later date after reading up on both schemes).

So, with both schemes looking rather rubbish, why hasn’t anyone considered a (fully rebated) direct tax on carbon itself as an alternative (I’m only raising this as I feel – with action guaranteed – that it’s the most sound option)? It would avoid the shortfalls of the above options as:

• It would be a straightforward tax on fossil fuels based on each fuel's carbon content
• It avoids the uncertainties of the cap and trade – a carbon tax would provide a clear and candid incentive to adopt energy-saving and carbon-minimising technologies
• The market will be left to determine how to most efficiently order affairs under those new prices (i.e. windmills, solar, hydrogen, whatever – the market will pick the most effective)
• It has a known cost and taxpayers could demand a commensurate reduction of other taxes (e.g. income tax)

That final point is the biggest reason why I would support “action” in the direct taxation of carbon over a cap and trade or Abbott-style scheme. The amount collected from it could be directly transferred back to the taxpayer in the form of a tax reduction elsewhere. The last thing we need is another black box for the government and banks to play with (hello carbon trading bubble!).

Now, let me end with something I think needs to be addressed more urgently, and will do more good for the environment than any of the above schemes: the removal of state-granted monopolies in power generation.

The carbon tax scheme I mentioned above will not work unless there is a free market in power generation (currently as there's no incentive to cut emissions utilities can just absorb the loss – their performance isn’t measured on profitability – or pass on the extra costs in the form of higher prices without even a glance at alternatives. It is also very difficult/impossible for a competitor to enter the market.). It's clear that state-sponsored public utility monopolies and the bureaucratic regulation of their pricing structures and investment options greatly limits the freedom of power markets...consumers lose the ability to choose their provider and the utilities lose their freedom to determine what to charge and what infrastructure to invest in.

If power was returned to the free market we would see more competition, better pricing, more cost-saving (more resources conserved) and more money flowing into green power.

It’s ironic that the government today spends money on adverts telling people NOT to use power during a period of high demand (e.g. a heatwave)...when if markets were in charge, a heatwave would not be looked at as a problem but as an opportunity. Entrepreneurs would be itching to meet demand instead of making excuses, just as they do in every other sector that is controlled by markets.

The real question is how can anyone be serious about helping the environment while these state granted monopolies are allowed to exist?

...at least not the economy, despite what Acting Victorian Premier Rob Hulls says to the contrary.

The Victorian Government says new economic modelling has vindicated its decision to pay for golfer Tiger Woods to play at last year's Australian Masters.

"Original projections were that the 2009 JBWere Masters would generate a $19 million boost to the Victorian economy but, due to unprecedented ticket sales and public interest, the actual impact was almost double what was forecast."

Woods received an appearance fee of $3.25 million, with the state government chipping in $1.5 million.

Major benefactors included major hotels, restaurants, taxis and the retail sector. 

This is a classic example of failing to take account of Bastiat's warning to consider what is not seen, as well as what is seen, when deciding where best to allocate taxpayer dollars. Yes, hotels, restaurants, taxis and retail did remarkably well for a brief period and who knows, maybe a few extra tourists will now visit as well. But this only what is seen. At first glance, it appears obvious that Woods was a boost to the local economy. Indeed, when I examine the comments on the two linked news articles above, almost all of them are full of praise for the government. But what happens when we look at what is not seen? The dollars expended to lure Woods had to come from somewhere.

If people are spending their money at local restaurants because they're there to watch Woods, there are other places - perhaps restaurants in their own neighbourhood - where they are not spending that money. The money spent by the state, whether raised through taxes or borrowing, would have been spent by someone on something else (with the expected benefits of these alternate projects being the opportunity cost of luring Woods).

The economic reports as quoted and paid for by the government always fail to apply an appropriate cost to the initial funds in their cost-benefit analysis. I don't have access to the report that Rob Hulls is quoting, but having read others I can only assume that they simply state the $1.5 million is like "mana from heaven" and does not represent a loss to the taxpayers when in reality, they should begin with a huge number in the cost bracket. Unfortunately we can never know what the money would have been spent on had the government not expropriated it for this purpose. But what we can say is it would have been used to satisfy the most urgent demands of consumers. The funds used to lure Woods, having been diverted from this most urgent - and therefore most valuable - use, must rank lower. Unfortunately modern cost-benefit analysis does not take any of this into account.

Yes, the cost to the individual taxpayer is relatively small and the benefits to large interest groups (golf, hoteliers, food, transport, retail and so on) who contribute significantly to government campaigns are enormous in comparison. But at the end of the day, if there was a profit to be made in luring Woods to Melbourne, private investors would likely have been quick to act to take advantage of the opportunity with their own funds. Instead, particular lobby groups have convinced the government to support Woods because it was not clear to them whether his arrival would have been profitable without taxpayer funding.

Unfortunately the majority of the population never even thinks about what is not seen. Economists who prepare reports for the government to justify their various subsidies - whether through ignorance or greed - never consider what is not seen (if they did the government would stop hiring them to prepare said reports!). I personally think that every high school student, well every person, should read Bastiat's short but brilliant essay The Broken Window. So much damage could be averted if people just considered what is not seen when deciding whether economic policy is worthwhile.

The banks don’t have to lend to inflate

Contrary to popular belief, banks do not need to lend to expand the money supply and eventually create price inflation. Yes, the Australian banks are still lending at an impressive rate but since the bust this has been predominantly to the housing, individual and public sectors, with commercial lending actually declining year-on-year (although it is already on the way back up from July lows).

Just because the demand for loans by businesses fell off does not mean that the monetary pumping undertaken by the RBA will have no effect on price inflation. Banks never have to be passive and, indeed, they usually waste no time in spending their new cash reserves. All they have to do to expand the money supply is buy existing securities, whether from each other or other corporations, thereby increasing deposits. They do not have to depend upon business firms to request commercial loans, or to float new bond issues.

…But it doesn’t matter anyway

Saying that, in a speech today the RBA's head of domestic markets department, John Broadbent, revealed that “…listed corporates have raised a record amount of equity this year, totalling some $60 billion, with issues broadly based across all sectors.” So not only are banks buying existing securities but they are buying up new bonds at record levels. This will be inflationary.

Mr Broadbent continued to say that most of these equity raisings had been used to pay down debt, with some companies explicitly saying the funds raised were to repay bank loans. While this may sound deflationary, it is not.  When someone pays back debt, the money used to pay that debt with does not suddenly disappear but simply goes to the creditor, in the case the bank. The bank then spends on additional security purchases, shares, or issues more loans which increase deposits. In other words, most if not all of the ‘repaid debt’ flows straight back into the economy.

The seeds have been sown

“The first sign of a hyperinflation is a rally in the stock market,” Jens O. Parrson, Dying of Money: A History of the Great German and American Inflations.

The new money and all-time low interest rates from the RBA coupled with a record fiscal deficit and added public debt obligations has created a new wave of malinvestments (investment in areas not aligned with consumer preferences but that which appears profitable thanks to the artificially low cost of credit and rising prices) in Australia that will eventually need to be liquidated. As an example of the rising confidence, the latest Dun & Bradstreet business expectations survey of 1200 business owners and executives shows expectations for investing in capital are at the highest level in 10 quarters, registering an index level of eight points. It is only a matter of time before the distortions created by all of the new cash created by the banks – and enabled by the RBA – will be revealed. While it may take a few years thanks to factors such as China’s demand for Australian resources, foreign accumulation of the Australian dollar (as bad as it was, every other nation appears to be inflating more) and so on, those same factors will mean the eventual bust will be worse in Australia than elsewhere.

The Australian recovery is not sustainable and rapid price inflation is a very distinct possibility.

The Bank of England is pumping another 25billion quid into the UK economy - up to a total of 200billion quid (Source).

Fantastic if you're a large corporation/bank in the UK - they 'ease' by buying corporate bonds. You get the cash first, spend at normal prices, by the time it feeds down to the poor/middle class prices have risen (the ‘Cantillon effect’). It's great way to further erode the already shrinking middle class and transfer wealth (after all, as printing more money devalues existing fiat, it’s also a form of wealth redistribution) to your buddies…then blame the free market for it and increase government intervention!

Quantitative easing may work in the short term by propping up prices and creating the illusion of prosperity but in the longer-term it means none of the necessary restructuring – liquidating of bad business (malinvestment) – will occur. The result is another more severe bust in the future.

Money 101

It all stems from a misunderstanding of what money actually is. Money is a medium of exchange; it represents a claim to an existing – already produced – good. But money itself is also an economic good like any other commodity in the economy and is therefore subject to diminishing marginal utility – in other words, if you create more of it, its exchange value declines. The methodology behind ‘quantitative easing’ – that people ‘horde’ money due to ‘animal spirits’ or something similar, thereby creating a ‘deficiency’ in aggregate demand, is false. Think about it: if people ‘horde’ money in a time of crisis, the price of all other commodities will continue to fall relative to money, therefore ‘deficiencies’ in aggregate demand won't occur. Allowing prices and wages to adjust is all that is necessary for recovery.

As stated, if you have an over-supply of all commodities it will mean a temporary fall in their value relative to money. As John Stuart Mill said in 1830, to suppose that the markets for all commodities could, in any other sense than this, be over-supplied, involves the absurdity that commodities may fall in value relative to themselves.

…and that right there is the Keynesian (and unfortunately, government/academic) position. It was the argument the Mercantilists used and was disproved many times over – Keynes simply restated the same fallacy.

Quantitative easing is nothing more than wealth redistribution that will create further distortions in the capital structure of the economy that will need to be addressed in the future. We can’t get rich (in the aggregate – some individuals obviously benefit immensely!) by printing. You can’t increase wealth by dividing it!

This was originally sent out on 30/10/2009 to a private mailing list; the content has not been modified. This article is also available in PDF format.

Crack the Champagne, the US is out of Recession

…but you might want to hold that thought. The announcement last night that the US had posted GDP growth of 3.5% should spur markets on in the short-term and temporarily delay the correction, but a quick glance at the numbers reveals things are not as rosy as it seems. Growth in GDP was led largely by the ‘cash for clunkers’ program which contributed 1.7%, or 48% of total GDP growth, with a large part of the remaining growth created by the government’s $8,000 tax credit for first-time home buyers. It is important to understand that these types of government initiatives do not create lasting growth, they create ‘statistical growth’.

When the government pays for someone to trade in their ‘clunker’ – a vehicle that is still functioning and probably could keep functioning for years – they are paying someone to destroy their property, something with real value. The short truth is that the destruction of anything of real value is always a net loss, a misfortune, or a disaster and whatever the offsetting considerations in a particular instance, can never be, on net balance, a boon or a blessing.

So while ‘cash for clunkers’ created positive gains according to GDP, a figure which measures all spending regardless of how destructive it is, it will not improve the long-term wealth (growth) of the nation. In summary, the latest GDP figures are nothing but a short-term burst of consumption created by the government. In real terms, taxes increased, personal income fell, disposable income fell and the savings rate sank, all while personal consumption increased, paid for by an increase in the federal deficit. This will not create lasting growth.

Australian CPI Up; Rate Rise Imminent

The latest CPI figures indicate that price inflation is coming (the ‘basket of goods’ the RBA measures increased by 1% QoQ) and the RBA will respond by hiking rates by an (estimated) 25 basis points on Melbourne Cup day in line with their inflation-targeting policy. We expect CPI inflation along with subsequent rate rises to continue into the new year.

What most people don’t realise is that the RBA is the culprit – rising prices are occurring because of the monetary pumping and financial sector bailouts the RBA engaged in back in late 2008/early 2009 as discussed in the October edition of Ausnomics. Inflation (monetary) is indiscriminate; its effect will be different on different parts of the economy. The same monetary pressure which in some parts of the economy may have reduced unemployment will in others produce definite and disastrous inflationary effects. The aggregate thinking and disregard of the economy’s capital structure by academics, the RBA and the government necessitates that these important implications are neglected.

Market Correction is Happening Now

The United States public and mainstream media are finally waking up to the fact that their government has been recklessly spending, creating massive new ‘initiatives’ (i.e. health) without funding them, dishing out cheap credit to politically favoured sectors and telling businesses where and how to invest. Unfortunately the Australian media still has no clue that we have been doing exactly the same – the smokescreen that is China and the resources industry is, so far, covering up the evidence.

The Fed has been (not-so)secretly bailing out the banks with massive reserves that they pay interest on. It is actually quite amusing – economic fascism at its best! The Fed gives banks cash, pays them to keep it at the Fed/buy Treasury bonds (you see if they spend it – like the Australian banks have already done – it creates ‘price inflation’), the banks simultaneously write off their bad debt and make a profit to boot. They then pay themselves big bonuses which the government criticises them for: funny, as all of that free money was dolled out to them by the government in the first place!

All of this bad news and growing anxiety could see the Australian market, as it has historically, follow the US-led correction.

Growing Public Angst

General Motors has asked for even more federal money to keep them going – surely the better option was to let them fail and allow the good parts (yes, they still have a lot of good assets and employees) to be bought and for the rest to necessarily liquidate. Unfortunately the government has declared their hand and they have to follow through to the end, something the public is growing concerned about. Further doubts about the health of the recovery will be raised over the next couple of months which should temporarily push the bulls to the side.

Australian welfare state keeps growing and growing and growing…

The big question is: how are we going to support this when resource prices eventually crash as they did back in the 1970s? Will we have another decade of double digit price inflation as the RBA tries to inflate away our public welfare, debt and other obligations?

Unless this trend changes, that is the most likely scenario. Rudd’s national healthcare policy (no doubt to be unveiled as an election promise) and emissions trading scheme, if successful, will only add to the nation’s commitments and future debt levels. Australia simply cannot afford these ‘initiatives’ – the resources boom won’t last forever and the nature of politics is to spend spend spend with little regard for the future. As the late Dr. Adrian Rogers said, ”…the government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”

…Now for Some Political Economy: Why More Government is Not the Answer

To quote Gordon Gecko, the fictional character from the movie Wall Street, “greed is good!” The world runs on individuals pursuing their separate interests. History has shown us time and time again that the only way in which people have escaped from poverty are where they have had capitalism and largely free trade. If you want to know where people are worst off, it is exactly in the kinds of societies that depart from that. There is no alternative way of improving the lives of ordinary people than the productive activities that are unleashed by the free market.

As Adam Smith famously said in the Wealth of Nations (I.ii.2: pp 26-27),  ”…it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Ask yourself this: how is political self-interest somehow better than economic self-interest? Where are these omniscient angels going to come from? With capitalism, the only people who can rise to the top and stay there are those who consistently meet the changing demands of the consumers. Under economic competition, people compete (earn economic profit) by best serving the consumer. By contrast, the worst tend rise to the top of the political ladder as there is a tendency for these people to both desire power and be effective at using it. Under political competition, politicians compete (earn political profit) by supplying wealth transfers to interest groups through legislation and regulation.

Just remember that the free market or “excessive greed” did not cause this crisis; political self-interest, market interventionism and mercantilist policies did.

I was recently asked to do some work involving choice modelling as a method to calculate 'willingness to pay' for things such as job losses; wetland expansion; waterbird breeding; number of endangered species; and so on. What I do not understand[1] is why it is even necessary?

I'm a firm believer in subjective rather than objective values and that the nature of human beings is that values are constantly changing. You can measure values at a point in time – you can say that because I traded an apple for an orange at point x, I valued the orange more at that point in time (and the person I traded with valued the apple more at that point in time). But values change – an hour later I may prefer the apple. You also cannot prescribe a monetary value to that trade – money itself is an economic good, subject to the same changing preferences and diminishing marginal utility as any other economic good. It would be like trying to say the apple and orange transaction was worth a total of one pear.

Choice modelling does not measure past actions (exchange), it merely relies on a survey asking people to reckon their demand curves based on a few options…no doubt due to the impossibility of mapping a full schedule of preferences. But that means that, by necessity, a certain number of alternatives must be excluded from the menu of options over which a person can hypothetically spend their money. The result is that the conclusions about people's 'willingness to pay' will be misleading at best[2].

In the surveys, people are asked to choose between certain 'costs', but how can a choice be made, unless there is some common unit of measurement by which to calculate human vs. environmental vs. other costs? Value is subjective, therefore so is cost, meaning information about human cost is not directly observable…the only information we have about human cost is revealed through voluntary exchange; through trade. In a voluntary exchange, each person reveals that the thing they acquire is ranked higher on their personal value scale than the thing they give up.

For example, environmental degradation for one person may not be another person's degradation. A farmer viewing the encroachment of the wetland onto his cultivated field may regard it as damaging while another person may find it beneficial. Without reference to the impact on a decision-making individual the whole idea of an environmental cost is nonsensical. So if that’s the case, then we’re back to the problem of comparing human valuations.

The only solution that I can see – the solution that works elsewhere – is a price system, which implies private property rights and the freedom to voluntarily exchange that property. Anything to the contrary will lead to superficial or misguided claims and potentially damaging policy recommendations. To put it bluntly, we need a free market for water.

How about this as a solution: instead of the government forcing everyone to pay additional fees to create more wetlands, create a holding company (which owns the land) and auction off shares, say one billion shares at whatever price people are willing to pay, to anyone willing to buy. Then if the majority wanted to preserve the wetlands, waterbirds and endangered species, as owners of the land, they could reduce the amount they supply for irrigation. If the farmers value the water more than the residents value the wetlands, then they will outbid them for water. They are not going to drain the thing dry; and as with every good, water has a diminishing marginal utility. The first x amount of water has far more value to the farmer than the remaining y. It is likely that residents will value y more than the farmers and will therefore outbid them. This is just one of an infinite number of potential ways the market could fix the problem of water shortages and is the beauty of the market system; we can never know in advance how it will solve problems until it does.

Yes, market prices would probably end a lot of farmers, but it is the only fair way. Why is it that only government is allowed to buy up water – why not allow private citizens to do it as well (they are ultimately paying for it anyway). Under a private system of ownership – or even a quasi-private one in which water rights would be created then bought and sold freely between whomever was interested (if the government wanted to keep land ownership but sell water) – the water would go to the people willing to pay for it. If people actually had to pay market prices for water, and that water were privately owned, it is doubtful that the kind of waste that has occured and is still occuring would exist today. Government policies have resulted in misallocated resources and development that cannot be sustained. The solution, as with most things, is not more government involvement and 'choice modelling' to determine how much they can plunder from the populous without a voter backlash, but a free market in water.

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[1] I do understand: there are a lot of socialists in charge who will not even comprehend a non-governmental solution. As a socialist system cannot calculate, they are forced to resort to these 'second best' solutions.

[2] Not only that, but due to 'budget and time constraints', something called 'benefit transfer' has been developed, where preferences from prior surveys on different (but 'similar') issues are used to estimate 'willingness to pay' for a new scenario. The problem with this is that it makes little sense to talk about how much people value something independent of them being in a specific situation where they have to make their choice. How much people value things will always be contingent on the time and place and therefore 'benefit transfer' will be even more misleading than a normal choice model.

Treasury Secretary Dr. Ken Henry has stated what everyone already knows: if the stimulus is wound down early, jobs will be lost. Absolutely. No one is denying this. But the problem from a year ago has not changed one iota: government spending cannot create permanant jobs. The state takes its money from the private sector. It does not produce its own wealth. It cannot create any kind of meaningful employment.

"If all the stimulus scheduled to impact in 2010/11 was cancelled that would mean a further detraction of 1.5 per cent from GDP (gross domestic product) growth and the loss of up to an additional 100,000 (jobs)," he said.

The jobs are going to go anyway. I think what Dr. Henry means is that he wants to delay the job losses as long as possible to give his lackeys down at the Reserve Bank enough time to kickstart another fiduciary boom. You see, if we can get enough funny money into the economy before the stimulus is wound down then these jobs created out of nowhere suddenly look sustainable and indeed necessary to businesses around the country. They get misled into thinking we have all been saving more than we actually have been and that capital is abundant when in fact it is anything but.

Eventually we have to bear the costs of these inflationary policies. The longer we delay it, the more painful it becomes. But, luckily for Dr. Henry, Kevin Rudd and Glen Stevens, they will all have retired on fat government pensions by then. Ah, the beauty of short-term solutions!

In other news, Jesús Huerta de Soto has given a speech on the causes of the crisis which everyone should check out if they have the time.

Have a good weekend.

The recent interventionist policy enacted by ACT chief Minister John Stanhope represents a gross misunderstanding of the nature of competition. It will result in nothing more than higher prices for consumers to protect a small minority of businesses. The only reason independent retailers fail to succeed is, quite simply, because they are not profitable enough to stay open. Whether this is because they are not efficient enough due to poor economies of scale, labour costs, or some other reason is irrelevant.

Funnily enough, "...the architect of the ACT policy is John Martin, who was a long time commissioner at the Australian Competition and Consumer Commission with special responsibility for small business." So a man with a vested interest in helping out a particular lobby group, small business, is using his coercive powers in government to impose legislation that consumers do not want. Why does this not surprise me? Apparently, "...Mr Stanhope is turning the ACT into a test bed for interventionist polices aimed at improving competition policy." In other words, he is using flawed logic of 'more firms = more competition = lower prices' to justify his intervention.

As long as the government stays out of the way, which also includes not providing favours to the big three retailers, a free market dominated by a few firms is not a bad thing. The cheaper prices provided by Woolworths, Coles and IGA provide everyone in the economy with additional income to spend elsewhere (the savings they now make they can use to acquire more goods than they could before). This savings will then be spent in other areas of the economy enabling everyone to gain additional products and will also create jobs in the process.

If people honestly wanted to support small retailers, they would vote with their wallets. The minister should remove the intervention and let the people speak through their own actions rather than using the strong arm of government to impose his views on others. The big three cannot charge monopoly prices without illegal coercion (bribes, intimidation, etc), government-created barriers to entry (regulation, etc) or other government involvement (political favours, subsidies, etc). The only way they can keep competition out and then maintain their position is by improving their products and/or narrowing their profit margin to the point that competitors cannot enter.

To me, that sounds like a win for everyone involved, unless of course you're a small business lobby group or a politician handing out and receiving favours.

In a "better late than never" move, the RBA raised the cash rate by 25 basis points to 3.25 per cent earlier today based on stronger than expected "economic conditions" and "measures of confidence". This was not entirely unexpected, as we reported last month the only way rates would remain at 3 per cent was if the incumbent Labor party had enough sway to 'persuade' the RBA to hold rates.

The only way to artificially keep interest rates down is to increase the money supply – whether through the purchase of government securities, increasing the amount of cash in the economy or lowering the discount rate (encouraging banks to borrow more).

Record growth in M3 thanks to the loose money policies around the world following the last 'bust' (2001ish) saw the pressure on interest rates soar considerably leading up to the crash and instead of further raising rates[1] – a move that was necessary to allow the prior malinvestment to liquidate and for prices to coordinate downwards – the RBA simply flooded the financial sector with additional money thereby preventing any restructuring from occurring.

The structural flaws in the economy – a capital structure still swarming with malinvestments that are not aligned with the intertemporal (time) preferences of the consumers – have resulted in inflated prices in several industries such as housing, construction, banking and finance.

"As soon as deflation makes itself felt, there will be immediate attempts to combat it—often when it is only a local and necessary process that should not be prevented," Friedrich August von Hayek.

Inflating the money supply is a short-term solution that cannot create any additional long-term wealth. Real savings are the barometer for investments that can be successfully carried through to completion: by inflating the money supply the RBA merely deceives investors into thinking the pool of real savings is larger than it actually is. It gives them the impression that consumers have forgone current consumption thereby freeing up more capital for longer-term projects aimed at increasing the productive capacity of the economy.

Think of inflation as you would drug taking: it is disastrous for long-term health, but it can work wonders and make you feel great in the short-term. Likewise, deflation is akin to a drug taker going through withdrawals – it can be quite painful in the short-term but will result in improved long-term health. Unfortunately, the nature of politics is that only one option, inflation, is viable.

Following the outbreak of the 'credit crunch', the governments fearmongering strategy was put into good effect to gain short-term popularity and, more importantly, push for favoured policies that have turned a necessary market correction in a few selected industries into a much more severe, economy-wide problem.

To offset the inflation set in motion by the reckless monetary pumping of the past year, the RBA is raising interest rates. This will attract foreigners seeking a higher yield and should therefore strengthen the dollar relative to other currencies in the short-term. It can only be expected that the RBA will to continue to breach their policy of abstaining from currency manipulation to keep the $AUD below one $USD under the guidance of their mercantilist think bots in an attempt to avoid a slowdown in export growth. This directly contradicts their attempt at keeping inflation at bay and will instead lead to further increases in the money supply and, consequently, price inflation.

Despite relatively small 'inflation' – the CPI figure is up 1.5% YoY, the record amount of pumping undertaken by the RBA cannot be swept under the rug; it will have a serious effect on the wider economy in the future. While businesses are reducing their risk by reducing leverage, banks are still increasing their loans year-on-year (we never came close to having a 'credit crunch') within the banking sector, to consumers and into mortgages.

Unfortunately for the economy, the seeds of the next fiduciary inflationary bubble have been well and truly sown.

"The market rate of interest cannot be lowered by a credit expansion except for a short time, and even then it brings about all those effects which the theory of the trade cycle describes," Ludwig von Mises.

The Australian economy has been flooded with a fresh batch of cheap money. The level of savings is below 5% of disposable income. Private debt is still over 150% of disposable income. Housing is as expensive as ever. The 'stimulus' simply, at best, kept people employed where they happened to be (hint: areas of malinvestment), at worst further distorted the distribution of labour and capital structure of the economy. Public debt is at record highs. Unemployment will continue to get worse as the stimulus wears off and the jobs that were 'saved' are once again, necessarily, 'lost'. Price inflation will rear its head (of course with a mighty lag thanks to the heavily manipulated CPI) and interest rates will have to rise further.

The above are hardly what you would call solid pillars of growth. The economy is anything but healthy and any recovery will not be sustainable.

Unless the free market is given permission to work and the necessary liquidation and restructuring allowed to occur, problems will continue to appear and will be addressed, again and again, by policies that only deal with the immediate, visible effects; effects caused by the very policies designed to combat them! The result will be bigger government, higher inflation and our very own 'lost decade'.

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[1] Of course the best way would be to leave interest rates - effectively the price of borrowing money - for the free market to determine. Government price controls never, ever end well.

Building on what Drwasho wrote back in June, I have to say, I’m really not sure. There’s a good reason to believe both could happen but as always timing is the hardest part to predict.

The case for deflation is a strong one – commercial bank credit is in freefall as banks look to let their commercial loans run down and don’t seem to be replacing them with new investments. This has to have a strong deflationary effect on the economy and it’s unlikely any amount of prime-pumping on behalf of the Fed can counteract it. In fact, a lot of the new money is simply sitting in excess reserves, likely going into treasuries or simply collecting interest from the Fed (a new ‘tool’ in the Fed’s arsenal – paying interest on excess reserves) rather than funding new loans.

The deflationary theory is hardly new; it’s exactly what happened during the great depression. Rothbard, in America’s Great Depression, highlighted a few key reasons as to why deflation occurred despite the low interest rate, cheap money inflationary policy pursued by the government of the day. They are:

1)     Lower interest rates further discouraged the banks from making loans or investments. Just when risk was increasing, the incentive to bear risk—the prospective interest-return—was being lowered by governmental manipulation.

2)     The enormous increase in bank failures. With over 1,000 banks failing every year, bankers knew in their hearts that no bank (outside of the nonexistent ideal 100 percent bank) could ever withstand a determined run.

3)     Foreigners lost confidence in the dollar, partly as a result of the program, and drew out gold;

4)     American citizens lost confidence in the banks and changed their deposits into Federal Reserve notes;

5)     Bankers refused to endanger themselves any further, and either used the increased resources to repay debt to the Federal Reserve or allowed them to pile up in the vaults.

Today a lot of the conditions that prevented the politically ‘desired’ inflation from occurring back in the 1930s don’t exist. For one, we have a fiat money regime rather than a gold standard making it harder for foreigners to convert their US dollars to gold or other assets without losing value. Another big difference is that government’s around the world enacted a policy of deposit insurance, thereby preventing mass bank failures (creating ‘zombie banks’ instead) through bank runs. But aside from those two differences, the other points still hold true.

It’s important to remember that Bernanke is well schooled in the great depression. His problem is not that he doesn’t understand why inflation didn’t occur; it’s that he still believes inflation is the correct solution and is therefore looking to prevent the above from causing deflation this time around. He’s going to go all-out in an attempt to reinflate the bubble rather than let the necessary deflation and restructuring work its magic.

So can he do it?

This is what I’m not sure about. It’s going to be very difficult to get people to leverage up this time around. What we do know is that Bernanke will stop at nothing in his attempts to reinflate the bubble, an effort which may amount to nothing more than blowing air into a broken balloon. Excess reserves have increased astronomically, as they did in the great depression, but the question is whether they will make it into the money supply or not. At this stage every attempt has been fleeting with banks quite happy to buy up treasuries or simply take the small, but safe, return that the Fed pays them.

Will the new powers the Fed is after allow Bernanke to charge a negative interest rate on excess reserves, forcing banks to buy existing securities or create new loans, thereby increasing the true money supply? Will the growth in the public sector, public works, ‘stimulus’ and so on create enough spending to drive inflation faster than the private sector is deflating? These are all very curious questions and unfortunately, at this stage, no one knows. We’re stuck in limbo and all I can say is that the next several months are going to be very, very interesting.

Concerning Australia, this time around we have China. While in the great depression we were one of the hardest hit due to our export dependence and protectionist policies pursued by our major trading partners, this time we have a centrally-planned major trading partner in China instructing their factories to keep production up and, therefore, demanding our commodities. The export-focused, mercantilist policies of the Chinese government, while depriving their own citizens of deserved wealth, are in effect a subsidy for the Australian economy. By artificially keeping their currency low and subsidising their export industries they’re not only increasing demand for our raw materials but are supplying us with goods that are cheaper than they would be if China was a more free market orientated country. Yes, this is a bad thing for the Chinese people, but it’s good for Australians.

This leads me to believe that it won’t be as bad here as it will be in Europe and the US, despite our government rolling out the third largest stimulus package behind only the US and Korea (on a per-capita basis). The biggest threat to Australia is the growing size of the public sector, of increased regulation and the massive debt that we, and future generations, have been laden with for no good reason.

It seems, as with the US, Australian banks are finding it difficult to (likely voluntarily) create new loans to replace the ones that are running down. I’m more concerned, at this stage, about inflation in Australia than in the US. The RBA has been a bit reckless with their monetary policy – for example, they just increased the currency stock by $4 billion – an increase of almost 10% on the existing supply. This is money that won’t be sitting idle; it’s being spent and will have an impact on prices, perhaps not immediately due to the winding down of credit, but it will in the future. What happens when the banks start expanding credit and the RBA’s cash injection is already flowing?  This, together with the irresponsible spending by the government will have to force interest rates to rise if we’re to have any chance of avoiding price inflation.

When the government’s stimulus proves to be ineffectual at providing long-term jobs we’re probably going to be faced with rising inflation, rising interest rates and rising unemployment. But with an election looming, we probably won’t hear anything about that until Rudd is sworn in for a second, and probably final, term. The Keynesian solution adopted by this government requires endless doses of government spending, deficits and new money which will only lead to a growth in the welfare state, inflation and wealth destruction. The real solution is simple: get the government out of the way and let the necessary coordination between prices, costs and wages take effect.

It's late and for some reason I'm trawling the drivel that is the Australian media and stumbled upon a couple of articles which are correct but at the same time horrendously wrong in both their analysis and economics.

The first article - and let me add that as it involves a union it comes as no surprise - states that "...a China FTA could create 12,000 jobs for Australia but take away another 170,000 in the manufacturing industry." Now I'm not questioning their numbers - I'm sure the source (a report paid for by the Electrical Trades Union (ETU), hah) is reliable enough - I'm questioning the conclusions they derive from it. Dean Mighell, secretary of the ETU, goes on to say:

"People in the factories, people on the farms, small business people should have real and serious concerns about the implications of free trade agreements," he said.

"The ETU commissioned this report because we think that if we entered into a free trade agreement with China it is the death knell for our manufacturing industries and many of our food-producing industries."

Dean is correct but the solution he's after, for the government to prevent free, voluntary exchange between individuals is not something the government needs to involve itself in. By 'protecting' the manufacturing and food-producing industries by preventing the "dumping of goods into Australia" and other 'evils' that will lower the price of consumer goods in Australia, he is depriving every Australian of a potential increase in their standard of living. Yes, some small interest groups may lose their jobs, but the cheaper prices brought about by the increased competition will provide everyone in the economy with additional income to spend elsewhere (the savings they now make they can use to acquire more goods than they could before). This savings will then be spent in other areas, increasing demand, replacing the jobs that were 'lost'. Not only will we lose no jobs (in the aggregate), but we've all gained additional products, or wealth (of course, government intervention in the form of rigid wages, union barriers to entry and so on can restrict or delay the reallocation of labour resulting in unemployment).

The second article - the one I'm more peeved about - involves the OECD scratching the back of a fellow socialist and "new world order" advocate, Kevin Rudd.

"Australia's fiscal stimulus package seems to have had a strong effect in cushioning the decline in employment caused by the global economic downturn," it said.

"Less by the end of 2010 than if no fiscal stimulus measures had been taken," it said.

Now I'm not sure what these guys at the OECD get paid but if it's more than $0 then it's too much. They plainly state the obvious - that the stimulus prevented job losses - without going into any kind of in-depth, critical analysis at all. Of course the stimulus prevented job losses! It simply protected or insulated industries and jobs which are victims of catastrophic, unsustainable malinvestment and prevented the necessary realignment and restructuring of jobs, wages and prices. Is this sustainable in the long term? No, unless of course they plan to inflate yet another bubble and continue the boom-bust cycle, a policy that Hayek noted would eventually collapse on itself or, worse, lead to full blown socialism. To quote [emphasis added]:

"The great problem in all those instances is whether such a policy, once it has been pursued for years, can still be reversed without serious political and social disturbances. As a result of these policies, what not very long ago might merely have meant a slightly higher unemployment figure, might now, when the employment of large numbers has become dependent on the continuation of these policies, be indeed an experiment which politically is unbearable.

"Full employment policies, as at present practised, attempt the quick and easy way of giving men employment where they happen to be, while the real problem is to bring about a distribution of labour which makes continuous high employment without artificial stimulus possible. What this distribution is we can never know beforehand. The only way to find out is to let the unhampered market act under conditions which will bring about a stable equilibrium between demand and supply. But the very full employment policies make it almost inevitable that we must constantly interfere with the free play of the forces of the market and that the prices which rule during such an expansionary policy, and to which supply will adapt itself, will not represent a lasting condition.

"These difficulties, as we have seen, arise from the fact that unemployment is never evenly spread throughout the economic system, but that, at the time when there may still be substantial unemployment in some sectors, there may exist acute scarcities in others. The purely fiscal and monetary measures on which current full employment policies rely are, however, by themselves indiscriminate in their effects on the different parts of the economic system. The same monetary pressure which in some parts of the system might merely reduce unemployment will in others produce definite inflationary effects. If not checked by other measures, such monetary pressure might well set up an inflationary spiral of prices and wages long before unemployment has disappeared, and—with present nation wide wage bargaining—the rise of wages may threaten the results of the full employment policy even before it has been achieved.

"As is regularly the case in such circumstances, the governments will then find themselves forced to take measures to counteract the effects of their own policy. The effects of the inflation have to be contained or 'repressed' by direct controls of prices and of quantities produced and sold: the rise of prices has to be prevented by imposing maximum prices and the resulting scarcities must be met by a system of rationing, priorities and allocations.

"The manner in which inflation leads a government into a system of overall controls and central planning is by now too well known to need elaboration. It is usually a particularly pernicious kind of planning, because not thought out beforehand but applied piecemeal as the unwelcome results of inflation manifest themselves. A government which uses inflation as an instrument of policy but wants it to produce only the desired effects is soon driven to control ever increasing parts of the economy." - Friedrich August von Hayek: Studies in Philosophy, Politics and Economics, pp. 270–76

Apologies for the long quote but I felt it necessary. Back to the theme of this post, the horrible economic (or lack of) analysis provided by the Australian media (it's expected from the OECD), I think I'm going to have to create some kind of award for the worst piece of Australian economic/political journalism, perhaps on a monthly basis, just to highlight how completely oblivious they are on the entire subject. They, well the majority, just blindly regurgitate what the 'experts' tell them without a second thought. Did no one teach these people how to think?

Just one final word on the Hayek quote, mainly the final part about the government being "...driven to control ever increasing parts of the economy." This is something we're seeing in the US as well as here, governments get involved in the first place and then blam the market for problems caused by that very involvement, such as: creating a telecommunication monopoly, turning it into a quasi-private monopoly then blaming the market for it; maintaining a quasi-private health market which drives up the costs for everyone; inflating the money supply causing a financial crisis (and later inflation); and so on. What's the governments response to all of these government-created problems? More government, more regulation and more control. That simply equates to less individual freedom, higher prices and shortages/restrictions of some kind.

We need reform, but not the kind our politicians are currently undertaking. In fact, if you took everything Rudd and his legion of do-gooders have done since coming to office, doing the polar opposite wouldn't have been such a bad policy response.

Every high school or university student who studies economics and even the average layman who reads or listens to the media and the politicians is of the belief that inflation is a price phenomenon. They’re told that higher inflation and, consequently, higher interest rates are the result of higher prices – a nice little semantic trick, a renaming of terms which leads people to believe exactly what the government wants them to.

The “official” definition of inflation is akin to putting the carriage in front of the horse: a general increase in the price level occurs because of inflation, not the other way around. Prices don’t just rise for no reason; they rise because of unforeseen events (e.g. a natural disaster or drought causing a supply shortage or government regulation/price controls) or through the debasement of the currency – otherwise known as monetary inflation.

What I want to know is why so many smart people never ask the question: where do higher prices come from? To put it more succinctly, how is it that, with technology and productivity improving on a daily basis, prices go up rather than down?

The answer is in fact quite simple: prices rise year after year because the government (through their agency the Reserve Bank) increases the quantity of money in circulation. Let’s have a quick look at the data and see how much the money supply (M3) has increased since 1982 relative to Total Average Weekly Wages and the Price Level.

Quite staggering indeed. Over almost thirty years the government has increased the money supply by a whopping 1,363%. Wages, on the other hand, have only increased by 276% - but does that mean we’re 276% wealthier today than in 1982? Hardly. If you take a look at the increase in prices, they’ve risen by 193%. Yes, we are all wealthier today than we were in 1982, 78% wealthier in fact [1], and I should hope so too!

The issue I have is the endless improvements in technology and productivity are not being transferred entirely to the consumer, to the average Australian. The government, through the constant debasement of the dollar, takes a large percentage of the said gains for their excessive existence, wasteful ventures and to fund the welfare nanny state. This is effectively a hidden tax on everyone who is paid in Australian Dollars.

Not only that, but there are countless other problems caused by debasing the money supply aside from just theft, it: encourages malinvestment by suppressing interest rates and thus unemployment and wasted resources; keeps the poor poor (more on that in a bit); creates dependency on the state by eroding savings; encourages improvidence; and many, many more, including the eventual collapse of the monetary system itself (e.g. Germany, Zimbabwe). As Ludwig von Mises said,

“With regard to these endeavours we must emphasize three points. First: Inflationary or expansionist policy must result in overconsumption on the one hand and in mal-investment on the other. It thus squanders capital and impairs the future state of want-satisfaction. Second: The inflationary process does not remove the necessity of adjusting production and reallocating resources. It merely postpones it and thereby makes it more troublesome. Third: Inflation cannot be employed as a permanent policy because it must, when continued, finally result in a breakdown of the monetary system.”

So how do they do it? When the Reserve Bank increases reserves the new money has to flow somewhere. That ‘new money’ usually enters through the financial services industry through favourable credit conditions allowing them to lend to households, or invest on the stock market, real estate, and so on. If that doesn’t work, the government can always increase its deficit and oblige banks to monetise government debt (like they just did). The increased spending through “stimulus” and “infrastructure investment” enables the newly created money stock to enter the economy and therefore drive up prices [2].

As the first recipients of the new money, the banks and government are still buying at ‘normal’ prices – prices that haven’t yet adjusted to account for the recent increase in supply. This is how they secretly tax anyone earning or holding Australian Dollars – the increase in prices caused by the new money filters its way through the economy and the people who receive wage increases last – usually the poor – are the ones who are taxed the most. The financial sector, as early recipients – and usually the rich – benefits the most (after the government).

“To cover the fact that a central bank is merely a cartel which has been legalized, its proponents had to lay down a thick smoke screen of technical jargon focusing always on how it would supposedly benefit commerce, the public, and the nation... there was not the slightest glimmer that underneath it all, was a master plan which was designed from top to bottom to serve private interests at the expense of the public... the system is merely a cartel with a government facade,” G. Edward Griffin

Next time you hear a politician spouting off about how they’ll “fight inflation”, remember that they’re the ones who are causing it. All they would have to do if they honestly cared about lower prices and helping the 'battlers' would be to stop creating money, to cease deficit spending and to return to sound money. Unfortunately most, if not all politicians in Australia, don’t actually care about the 'battlers' so long as their own taxpayer-funded trough is kept full. So what’s the solution going forward? There are lots of ideas out there, from a return to a gold standard to free banking (i.e. banks being allowed to issue their own currencies) among others – but at the end of day the only thing that really matters is that ability to manipulate the money supply is taken away from the government as soon as possible.

“A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army...We must not let our rulers load us with perpetual debt,” Thomas Jefferson

We can always dream.

---

[1] Issues with the wage and CPI data aside (e.g. average wage may be higher but there may also be more unemployment. Likewise the CPI excludes a lot of 'everyday' items that may have risen significantly more than the figure suggests).

[2] There are other ways too – e.g. the Reserve Bank could always simply buy up assets for itself.

I'm back! Before I get settled back in I'd just like draw attention to an interesting journal article by Paul H. Rubin on Folk Economics, where he demonstrates that people aren't "programmed" to understand economics; instead, it's something that must be learned. This is in line with other studies I've read on gender differences in economics (which states that men have a better, on average, understanding of economics because they associate with people who have studied it within their social networks - in other words, they tend to be more exposed to it) and so on. All seem to conclude that it's exposure rather than "natural ability"; it's reading and study that dictate how proficient one is at economics (of course there are exceptions!). As I've mentioned earlier, getting people to take the "second step" in logic - to see beyond the immediate consequences of an action - can be quite the task!

Anyway, here's the abstract:

Folk economics is the intuitive economics of untrained persons. It is concerned with distribution, and does not allow for or understand incentives. Folk economic notions evolved in our ancestors in circumstances where there was little in the way of specialization, division of labor, capital investment, or economic growth. It can explain the beliefs of naive individuals regarding matters such as international trade, labor economics, law and economics, and industrial organization. It is important that voters understand economic principles. Economists would do a better job of persuading others and of teaching if we paid explicit attention to folk economics. Because untrained individuals do not fully understand gains from trade, training in economics is likely to improve welfare by increasing the number of trading opportunities. There is evidence that this is in fact true.

Go and have a read - it's only twenty odd pages. I'll get back to criticising the latest government "initiatives" in the next few days, not like it's difficult!

[This article is excerpted from "Man vs. the Welfare State". It was first published in 1949.]

Most of the champions of deficits — including the eminent John Maynard Keynes himself, the theory's chief architect — at least publicly professed to believe that the required deficit could be financed by selling bonds directly to the public, to be paid for out of savings. But again, the more sophisticated deficiteers must have seen that a man who buys a $1,000 bond out of his savings surrenders that much purchasing power for the life of the bond. In short, he loses just as much buying power as the government gains. On net balance, no new buying power has been created.

How, then, can the government "create" new purchasing power? It can do so only if it does not increase taxes at all, but "sells" its bonds to the banking system, and if the banks "pay" for them by creating deposit credits on their books in favor of the government. This leads to an increase in "the money supply" — that is, an increase either in the amount of currency or of demand bank deposits.

If the government's new bonds are sold directly to member banks, there tends to be a dollar-for-dollar increase in the money supply compared with the amount of new bonds. But if the government's securities get into the hands of the Federal Reserve Banks, they are used to create what is called "high-powered" money. This can lead to the creation of about $6 of new money for every dollar of new government securities.

It is not easy to give a satisfactory but short explanation of the reason for this to readers without any previous knowledge of monetary theory. When member banks "buy" government bonds and "pay" for them by creating a deposit credit on their books against which the government can draw, they are adding to the nation's supply of purchasing media. They are creating money out of government promises, and some would say they are creating money out of thin air.

Now if a member bank that has bought such government bonds sells them to its regional Federal Reserve Bank, it can ask that Reserve bank to credit the proceeds to the member bank's reserves with that Reserve bank. But if the member bank is a "city bank," it is required to keep a reserve with the Federal Reserve Bank of only 16½% against its net demand deposits. This means that the member bank is entitled to lend, and so create demand deposits for, about six times the amount of its reserves with the Federal Reserve Bank. That is why money created directly or indirectly by the Federal Reserve Banks is called "high-powered" money.

Thus new "purchasing power" is brought into being. Thus people have more money to buy more goods, create more jobs, stimulate more output, and restore prosperity.

At least so it seems for the moment. But soon there are other consequences.

If there have been heavy unemployment and much "idle capacity," the new monetary purchasing power in the system, by increasing the demand for commodities, may indeed lead to an increase in production, and hence to an increase in employment. This has been hailed as the great Keynesian contribution to economic theory and policy. But there are fatal flaws in it.

Unless there were some serious lack of coordination among prices, costs, and wages, mass unemployment would not exist in the first place. When it does exist, the only appropriate cure is individual adjustment of prices, costs, and wages to each other — the return of coordination. But this can be brought about automatically only if the competitive forces of the market are given free play.

The reason the Keynesian medicine can work — under special conditions and for short periods — is that by increasing monetary demand and prices it may increase both sales and profit margins, and so restore production and employment. Yet this could be done even more effectively — and without the poisonous side effects and aftereffects — by restoring freedom of competition and individual coordination of prices and wages.

The Keynesians think in terms of aggregates. Their remedy is to increase the total money supply, and thereby to bring the price "level" sufficiently above the wage "level" to restore or maintain profit margins and so keep the wheels of industry spinning at full speed.

This remedy is defective in two respects. It tacitly assumes that there is a uniform discrepancy between prices and wages and a uniform percentage of "idle capacity" throughout industry. Neither is true. If "industry" is estimated to be operating at 80% of capacity, we must remember that this figure is at best an average. It may cover a situation in which, say, industry A is operating at only 60%, industry B at 63%, and so on up to industry M at 97% and industry N at 100%. If we try to expand the money supply enough to return industries A and B to full capacity, we may completely "overheat" industries M and N and produce serious productive distortions and bottlenecks.

What is more, an increase in the stock of money, contrary to Keynesian theory, will begin to force an irregular increase in prices long before "full capacity" has been reached and the "slack" taken up — if only for the reason that the "slack" is never uniform throughout industry. In a very short time, also, with the increase in prices and the increase in the demand for labor, wages will start climbing too. Then, if the previous trouble was that most wages were already too high in relation to most prices, there will again be discoordination between wages and prices; and the Keynesian prescription will call for still further doses of government spending, deficits, and new money.

So the Keynesian medicine must lead to chronic deficits and chronic inflating of the money supply. This is precisely what we have had. It is no accident that we have just run eight annual deficits in succession, and that we have had 32 deficits in the last 38 years. It is no accident that the US money supply (currency plus demand deposits) has been increased more than fivefold — from $36 billion at the end of 1939 to $199 billion in September, 1969. And so it is no accident that, in spite of a tremendous increase in industrial production in this thirty-year period, consumer prices have increased (to June, 1969) by 164%.

Today the Federal Government is spending in a single year 269 times as much as in the fiscal year before the outbreak of World War I. The recent increase in annual spending is being attributed by government spokesmen to the cost of the war in Vietnam. Yet though in 1970 scheduled national defense expenditures are $35.6 billion greater than in 1960, total expenditures are $103.1 billion greater. This means that non-defense expenditures alone have increased $67.5 billion in the same period. It is not the war, but the determination to impose the welfare state, that has led to this incredible squandering.

A central fallacy of Keynesianism, as of all inflationary nostrums, is that they chronically confuse "income" in terms of paper money with real income in goods and services. It is possible to increase paper-money income to any amount by debasing the currency. But real income can only be increased by working harder or more efficiently, saving more, investing more, and producing more.

So let us not be too impressed by politicians who constantly cite the increase in dollar incomes, in dollar "gross national product," to show that we never had it so good. In Italy today, as a result of past inflations, it takes 624 lire to buy an American dollar. So anyone in Italy with an annual income or even total property worth more than $1,600 American dollars is already a millionaire in his own currency.

[This article was extracted from A Future of Peace and Capitalism (1973), available in full here]

Government intervention can be classified in two ways: either as prohibiting or partially prohibiting an exchange between two people -- between two consenting adults, an exchange beneficial to both parties; or forcing someone to make an "exchange" with the government unilaterally, in which the person yields something up to the government under the threat of coercion. The first may include outright prohibition of an exchange, regulating the terms--the price--of the exchange, or preventing certain people from making the exchange. As an example of the last intervention, in order to be a photographer in most states, one must be a duly licensed photographer--proving that one is of "good moral character" and paying a certain amount of moolah to the state apparatus. This in order to have the right to take somebody’s picture! The second kind of intervention is a forced "exchange" between us and the government, an "exchange" that benefits only the government and not ourselves. Of course, taxation is the obvious and evident example of that. In contrast to voluntary exchange, taxation is a matter of leaping in and coercively seizing people’s property without their consent.

It is true that many people seem to believe that taxation is not imposed without our consent. They believe, as the great economist Joseph Schumpeter once said, that taxes are something like club dues, where each person voluntarily pays his share of the expenses of the club. But if you really think that, try not paying your taxes sometime and see what happens. No "club" that I know of has the power to come and seize your assets or jail you if you don’t pay its dues. In my view, then, taxes are exploitation--taxes are a "zero-sum" game. If there’s anything in the world that’s a zero-sum game, it’s taxation. The government seizes money from one set of people, gives it to another set of people, and in the meanwhile of course lops off a large chunk for its own "handling expenses." Taxation, then, is purely and pristinely robbery. Period.

As a matter of fact, I challenge any of you to sit down and work out a definition of taxation that would not also be applicable to robbery. As the great libertarian writer H. L. Mencken once pointed out, among the public, even if they are not dedicated libertarians, robbing the government is never considered on the same moral plane as robbing another person. Robbing another person is generally deplored; but if the government is robbed all that happens, as Mencken put it, "is that certain rogues and loafers have less money to play with than they had before."

The great German sociologist Franz Oppenheimer, who wrote a magnificent little book called The State, put the case brilliantly. In essence, he said, there are only two ways for men to acquire wealth. The first method is by producing a good or a service and voluntarily exchanging that good for the product of somebody else. This is the method of exchange, the method of the free market; it’s creative and expands production; it is not a zero-sum game because production expands and both parties to the exchange benefit. Oppenheimer called this method the "economic means" for the acquisition of wealth. The second method is seizing another person’s property without his consent, i.e., by robbery, exploitation, looting. When you seize someone’s property without his consent, then you are benefiting at his expense, at the expense of the producer; here is truly a zero-sum "game"--not much of a "game," by the way, from the point of view of the victim. Instead of expanding production, this method of robbery clearly hobbles and restricts production. So in addition to being immoral while peaceful exchange is moral, the method of robbery hobbles production because it is parasitic upon the effort of the producers. With brilliant astuteness, Oppenheimer called this method of obtaining wealth "the political means." And then he went on to define the state, or government, as "the organization of the political means," i.e., the regularization, legitimation, and permanent establishment of the political means for the acquisition of wealth.

In other words, the state is organized theft, organized robbery, organized exploitation. And this essential nature of the state is highlighted by the fact that the state ever rests upon the crucial instrument of taxation.

I must here again comment on Professor Averitt’s statement about "greed." It’s true: greed has had a very bad press. I frankly don’t see anything wrong with greed. I think that the people who are always attacking greed would be more consistent with their position if they refused their next salary increase. I don’t see even the most Left-Wing scholar in this country scornfully burning his salary check. In other words, "greed" simply means that you are trying to relieve the nature given scarcity that man was born with. Greed will continue until the Garden of Eden arrives, when everything is superabundant, and we don’t have to worry about economics at all. We haven’t of course reached that point yet; we haven’t reached the point where everybody is burning his salary increases, or salary checks in general. So the question then becomes: what kind of greed are we going to have, "productive greed," where people produce and voluntarily exchange their products with others? Or exploitative greed, organized robbery and predation, where you achieve your wealth at the expense of others? These are the two real alternatives.

Returning to the state and taxation, I would point out incidentally that Saint Augustine, who is not famous for being a libertarian, did however set forth an excellent libertarian parable. He wrote that Alexander the Great had seized some pirate, and asked the pirate what he meant by seizing possession of the sea. And the pirate boldly replied: "What you mean by seizing the whole earth; but because I do it with a little ship, I am called a robber, while you, because you do it with a great fleet are called an emperor." Here Augustine highlights the fact that the state is simply robbery writ large, on an enormous scale, but robbery legitimated by intellectual opinion.

[This article is excerpted from "Studies in Philosophy", Politics and Economics, pp. 270–76".

Some people may feel doubt about the importance of this phenomenon. To the present writer it seems the main cause of the recurrent waves of unemployment. That during every boom period a greater quantity of factors of production is drawn into the capital goods industries than can be permanently employed there, and that as a result we have normally a greater proportion of our resources specialised in the production of capital goods than corresponds to the share of income which, under full employment, will be saved and be available for investment, seems to him the cause of the collapse which has regularly followed a boom. Any attempt to create full employment by drawing labour into occupations where they will remain employed only so long as credit expansion continues creates the dilemma that either credit expansion must be continued indefinitely (which means inflation), or that, when it stops, unemployment will be greater than it would be if the temporary increase in employment had never taken place.

If the real cause of unemployment is that the distribution of labour does not correspond with the distribution of demand, the only way to create stable conditions of high employment which is not dependent on continued inflation (or physical controls) is to bring about a distribution of labour which matches the manner in which a stable money income will be spent. This depends of course not only on whether during the process of adaptation the distribution of demand is approximately what it will remain, but also on whether conditions in general are conducive to easy and rapid movements of labour.

This leads to the second and more difficult part of our question to which, perhaps, no certain answer can be given, though the probability seems to us to point clearly in one direction. This is the question whether workers will on the whole be more willing to move to new occupations or new localities when general demand is rising, or whether mobility is likely to be greater when total demand is approximately constant. The main difference between the two cases is that in the former the inducement to move will be the attraction of a higher wage elsewhere, while in the second case it will be the inability to earn the accustomed wages or to find any employment in the former occupation which will exercise a push. The former method is, of course, the more pleasant, and it is usually also represented as the more effective. It is this latter belief which I am inclined to question.

That the same wage differentials which in the long run would attract the necessary greater number of new recruits to one industry rather than another will not suffice to tempt workers already established in the latter to move is in itself not surprising. As a rule the movement from job to job involves expenditure and sacrifices which may not be justified by a mere increase in wages. So long as the worker can count on his accustomed money wage in his current job, he will be understandably reluctant to move. Even if, as would be inevitable under an expansionist policy which aimed at bringing about the adjustment entirely by raising some wages without allowing others to fall, the constant money wages meant a lower real wage, the habit of thinking in terms of money wages would deprive such a fall of real wages of most of its effectiveness. It is curious that those disciples of Lord Keynes who in other connections make such constant use of this consideration regularly fail to see its significance in this context.

To aim at securing to men who in the social interest ought to move elsewhere the continued receipt of their former wages can only delay movements which ultimately must take place. It should also not be forgotten that in order to give all the men formerly employed continued employment in a relatively declining industry, the general level of wages in that industry will have to fall more than would be necessary if some of the workers moved away from it.

What is so difficult here for the layman to understand is that to protect the individual against the loss of his job may not be a way to decrease unemployment but may over longer periods rather decrease the number which can be employed at given wages. If a policy is pursued over a long period which postpones and delays movements, which keeps people in their old jobs who ought to move elsewhere, the result must be that what ought to have been a gradual process of change becomes in the end a problem of the necessity of mass transfers within a short period. Continued monetary pressure which has helped people to earn an unchanged money wage in jobs which they ought to have left will have created accumulated arrears of necessary changes which, as soon as monetary pressure ceases, will have to be made up in a much shorter space of time and then result in a period of acute mass unemployment which might have been avoided.

All this applies not only to those maldistributions of labour which arise in the course of ordinary industrial fluctuations, but even more to the task of large-scale reallocations of labour such as arise after a great war or as a result of a major change in the channels of international trade. It seems highly doubtful whether the expansionist policies pursued since the war in most countries have helped and not rather hindered that adjustment to radically changed conditions of world trade which have become necessary. Especially in the case of Great Britain the low unemployment figures during recent years may be more a sign of a delay in necessary change than of true economic balance.

The great problem in all those instances is whether such a policy, once it has been pursued for years, can still be reversed without serious political and social disturbances. As a result of these policies, what not very long ago might merely have meant a slightly higher unemployment figure, might now, when the employment of large numbers has become dependent on the continuation of these policies, be indeed an experiment which politically is unbearable.

Full employment policies, as at present practised, attempt the quick and easy way of giving men employment where they happen to be, while the real problem is to bring about a distribution of labour which makes continuous high employment without artificial stimulus possible. What this distribution is we can never know beforehand. The only way to find out is to let the unhampered market act under conditions which will bring about a stable equilibrium between demand and supply. But the very full employment policies make it almost inevitable that we must constantly interfere with the free play of the forces of the market and that the prices which rule during such an expansionary policy, and to which supply will adapt itself, will not represent a lasting condition. These difficulties, as we have seen, arise from the fact that unemployment is never evenly spread throughout the economic system, but that, at the time when there may still be substantial unemployment in some sectors, there may exist acute scarcities in others. The purely fiscal and monetary measures on which current full employment policies rely are, however, by themselves indiscriminate in their effects on the different parts of the economic system. The same monetary pressure which in some parts of the system might merely reduce unemployment will in others produce definite inflationary effects. If not checked by other measures, such monetary pressure might well set up an inflationary spiral of prices and wages long before unemployment has disappeared, and—with present nation wide wage bargaining—the rise of wages may threaten the results of the full employment policy even before it has been achieved.

As is regularly the case in such circumstances, the governments will then fi nd themselves forced to take measures to counteract the effects of their own policy. The effects of the inflation have to be contained or 'repressed' by direct controls of prices and of quantities produced and sold: the rise of prices has to be prevented by imposing maximum prices and the resulting scarcities must be met by a system of rationing, priorities and allocations.

The manner in which inflation leads a government into a system of overall controls and central planning is by now too well known to need elaboration. It is usually a particularly pernicious kind of planning, because not thought out beforehand but applied piecemeal as the unwelcome results of inflation manifest themselves. A government which uses inflation as an instrument of policy but wants it to produce only the desired effects is soon driven to control ever increasing parts of the economy.

[This article is excerpted from "Human Action". It was first published in 1949.]

In eighteenth-century France the saying laissez faire, laissez passer was the formula into which some of the champions of the cause of liberty compressed their program. Their aim was the establishment of the unhampered market society. In order to attain this end they advocated the abolition of all laws preventing more industrious and more efficient people from outdoing less industrious and less efficient competitors and restricting the mobility of commodities and of men. It was this that the famous maxim was designed to express.

In our age of passionate longing for government omnipotence the formula laissez faire is in disrepute. Public opinion now considers it a manifestation both of moral depravity and of the utmost ignorance.

As the interventionist sees things, the alternative is "automatic forces" or "conscious planning."[1] It is obvious, he implies, that to rely upon automatic processes is sheer stupidity. No reasonable man can seriously recommend doing nothing and letting things go as they do without interference on the part of purposive action. A plan, by the very fact that it is a display of conscious action, is incomparably superior to the absence of any planning. Laissez faire is said to mean: Let the evils last, do not try to improve the lot of mankind by reasonable action.

This is utterly fallacious talk. The argument advanced for planning is entirely derived from an impermissible interpretation of a metaphor. It has no foundation other than the connotations implied in the term "automatic" which it is customary to apply in a metaphorical sense for the description of the market process.[2] Automatic, says the Concise Oxford Dictionary,[3] means "unconscious, unintelligent, merely mechanical." Automatic, says Webster’s Collegiate Dictionary,[4] means "not subject to the control of the will,...performed without active thought and without conscious intention or direction." What a triumph for the champion of planning to play this trump card!

The truth is that the alternative is not between a dead mechanism or a rigid automatism on one hand and conscious planning on the other hand. The alternative is not plan or no plan. The question is whose planning? Should each member of society plan for himself, or should a benevolent government alone plan for them all? The issue is not automatism versus conscious action; it is autonomous action of each individual versus the exclusive action of the government. It is freedom versus government omnipotence.

Laissez faire does not mean: Let soulless mechanical forces operate. It means: Let each individual choose how he wants to cooperate in the social division of labor; let the consumers determine what the entrepreneurs should produce. Planning means: Let the government alone choose and enforce its rulings by the apparatus of coercion and compulsion.

Under laissez faire, says the planner, it is not those goods which people "really" need that are produced, but those goods from the sale of which the highest returns are expected. It is the objective of planning to direct production toward the satisfaction of the "true" needs. But who is to decide what the "true" needs are?

Thus, for instance, Professor Harold Laski, the former chairman of the British Labor Party, would determine as the objective of the planned direction of investment "that the use of the investor's savings will be in housing rather than in cinemas."[5] It is beside the point whether or not one agrees with the professor’s view that better houses are more important than moving pictures. It is a fact that the consumers, in spending part of their money for admission to the movies, have made another choice. If the masses of Great Britain, the same people whose votes swept the Labor Party into power, were to stop patronizing the moving pictures and to spend more for comfortable homes and apartments, profit-seeking business would be forced to invest more in building homes and apartment houses and less in the production of expensive pictures. It was Mr. Laski’s desire to defy the wishes of the consumers and to substitute his own will for that of the consumers. He wanted to do away with the democracy of the market and to establish the absolute rule of the production tsar. Perhaps he believed that he was right from a higher point of view, and that as a superman he was called upon to impose his own valuations on the masses of inferior men. But then he ought to have been frank enough to say so plainly.

All this passionate praise of the supereminence of government action is but a poor disguise for the individual interventionist's self-deification. The great god State is a great god only because it is expected to do exclusively what the individual advocate of interventionism wants to see achieved. Only that plan is genuine which the individual planner fully approves. All other plans are simply counterfeit. In saying “plan” what the author of a book on the benefits of planning has in mind is, of course, his own plan alone. He does not take into account the possibility that the plan which the government puts into practice may differ from his own plan. The various planners agree only with regard to their rejection of laissez faire, i.e., the individuals' discretion to choose and to act. They entirely disagree with regard to the choice of the unique plan to be adopted. To every exposure of the manifest and incontestable defects of interventionist policies the champions of interventionism react in the same way. These faults, they say, were the results of spurious interventionism; what we are advocating is good interventionism, not bad interventionism. And, of course, good interventionism is the professor's own brand. Laissez faire means: Let the common man choose and act; do not force him to yield to a dictator.

---

[1] Cf. A. H. Hansen, "Social Planning for Tomorrow," in The United States after the War (Cornell University Lectures, Ithaca, 1945), pp. 32-33.
[2] See above, pp. 315-316.
[3] (3rd. ed. Oxford, 1934), p. 74.
[4] (5th ed. Springfield, 1946), p. 73.
[5] Cf. Laski’s broadcast, "Revolution by Consent," reprinted in Talks, X, no. 10 (October, 1945), 7.

 

[This article is excerpted from "Economics in One Lesson". It was first published in 1946.]

THE ECONOMIC GOAL of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor. It is for this reason that men began putting burdens on the backs of mules instead of on their own; that they went on to invent the wheel and the wagon, the railroad and the motor truck. It is for this reason that men used their ingenuity to develop a hundred thousand labor-saving inventions.

All this is so elementary that one would blush to state it if it were not being constantly forgotten by those who coin and circulate the new slogans. Translated into national terms, this first principle means that our real objective is to maximize production. In doing this, full employment—that is, the absence of involuntary idleness—becomes a necessary byproduct. But production is the end, employment merely the means. We cannot continuously have the fullest production without full employment. But we can very easily have full employment without full production.

Primitive tribes are naked, and wretchedly fed and housed, but they do not suffer from unemployment. China and India are incomparably poorer than ourselves, but the main trouble from which they suffer is primitive production methods (which are both a cause and a consequence of a shortage of capital) and not unemployment. Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. World War II provided full employment for every nation involved. The slave labor in Germany had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment.

Yet our legislators do not present Full Production bills in Congress but Full Employment bills. Even committees of businessmen recommend “a President’s Commission on Full Employment,” not on Full Production, or even on Full Employment and Full Production. Everywhere the means is erected into the end, and the end itself is forgotten.

Wages and employment are discussed as if they had no relation to productivity and output. On the assumption that there is only a fixed amount of work to be done, the conclusion is drawn that a thirtyhour week will provide more jobs and will therefore be preferable to a forty-hour week. A hundred make-work practices of labor unions are confusedly tolerated. When a Petrillo threatens to put a radio
station out of business unless it employs twice as many musicians as it needs, he is supported by part of the public because he is after all merely trying to create jobs. When we had our WPA, it was considered a mark of genius for the administrators to think of projects that employed the largest number of men in relation to the value of the work performed—in other words, in which labor was least efficient.

It would be far better, if that were the choice—which it isn’t—to have maximum production with part of the population supported in idleness by undisguised relief than to provide “full employment” by so many forms of disguised make-work that production is disorganized. The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs. A much smaller proportion of the American population needs to work than that, say, of China or of Russia. The real question is not how many millions of jobs there will be in America ten years from now, but how much shall we produce, and what, in consequence, will be our standard of living? The problem of distribution on which all the stress is being put today, is after all more easily solved the more there is to distribute.

We can clarify our thinking if we put our chief emphasis where it belongs—on policies that will maximize production.

[This article is excerpted from "Human Action". It was first published in 1949.]

The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain’s orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.

The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms. They make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities. They are merciless bosses, full of whims and fancies, changeable and unpredictable. For them nothing counts other than their own satisfaction. They do not care a whit for past merit and vested interests. If something is offered to them that they like better or that is cheaper, they desert their old purveyors. In their capacity as buyers and consumers they are hard-hearted and callous, without consideration for other people.

Only the sellers of goods and services of the first order are in direct contact with the consumers and directly depend on their orders. But they transmit the orders received from the public to all those producing goods and services of the higher orders. For the manufacturers of consumers’ goods, the retailers, the service trades, and the professions are forced to acquire what they need for the conduct of their own business from those purveyors who offer them at the cheapest price. If they were not intent upon buying in the cheapest market and arranging their processing of the factors of production so as to fill the demands of the consumers in the best and cheapest way, they would be forced to go out of business. More efficient men who succeeded better in buying and processing the factors of production would supplant them. The consumer is in a position to give free rein to his caprices and fancies. The entrepreneurs, capitalists, and farmers have their hands tied; they are bound to comply in their operations with the orders of the buying public. Every deviation from the lines prescribed by the demand of the consumers debits their account. The slightest deviation, whether willfully brought about or caused by error, bad judgment, or inefficiency, restricts their profits or makes them disappear. A more serious deviation results in losses and thus impairs or entirely absorbs their wealth.Capitalists, entrepreneurs, and landowners can only preserve and increase their wealth by filling best the orders of the consumers. They are not free to spend money which the consumers are not prepared to refund to them in paying more for the products. In the conduct of their business affairs they must be unfeeling and stony-hearted because the consumers, their bosses, are themselves unfeeling and stony-hearted.

The consumers determine ultimately not only the prices of the consumers’ goods, but no less the prices of all factors of production. They determine the income of every member of the market economy. The consumers, not the entrepreneurs, pay ultimately the wages earned by every worker, the glamorous movie star as well as the charwoman. With every penny spent the consumers determine the direction of all production processes and the details of the organization of all business activities. This state of affairs has been described by calling the market a democracy in which every penny gives a right to cast a ballot.12 It would be more correct to say that a democratic constitution is a scheme to assign to the citizens in the conduct of government the same supremacy the market economy gives them in their capacity as consumers. However, the comparison is imperfect. In the political democracy only the votes cast for the majority candidate or the majority plan are effective in shaping the course of affairs. The votes polled by the minority do not directly influence policies. But on the market no vote is cast in vain. Every penny spent has the power to work upon the production processes. The publishers cater not only to the majority by publishing detective stories, but also to the minority reading lyrical poetry and philosophical tracts. The bakeries bake bread not only for healthy people, but also for the sick on special diets. The decision of a consumer is carried into effect with the full momentum he gives it through his readiness to spend a definite amount of money.

It is true, in the market the various consumers have not the same voting right. The rich cast more votes than the poorer citizens. But this inequality is itself the outcome of a previous voting process. To be rich, in a pure market economy, is the outcome of success in filling best the demands of the consumers. A wealthy man can preserve his wealth only by continuing to serve the consumers in the most efficient way. Thus the owners of the material factors of production and the entrepreneurs are virtually mandataries or trustees of the consumers, revocably appointed by an election daily repeated. There is in the operation of a market economy only one instance in which the proprietary class is not completely subject to the supremacy of the consumers. Monopoly prices are an infringement of the sway of the consumers.

The Metaphorical Employment of the Terminology of Political Rule

The orders given by businessmen in the conduct of their affairs can be heard and seen. Nobody can fail to become aware of them. Even messenger boys know that the boss runs things around the shop. But it requires a little more brains to notice the entrepreneur’s dependence on the market. The orders given by the consumers are not tangible, they cannot be perceived by the senses. Many people lack the discernment to take cognizance of them. They fall victim to the delusion that entrepreneurs and capitalists are irresponsible autocrats whom nobody calls to account for their actions.[1]

The outgrowth of this mentality is the practice of applying to business the terminology of political rule and military action. Successful businessmen are called kings or dukes, their enterprise an empire, a kingdom, or a dukedom. It this idiom were only a harmless metaphor, there would be no need to criticize it. But it is the source of serious errors which play a sinister role in contemporary doctrines.

Government is an apparatus of compulsion and coercion. It has the power to obtain obedience by force. The political sovereign, be it an autocrat or the people as represented by its mandataries, has power to crush rebellions as long as his ideological might subsists.

The position which entrepreneurs and capitalists occupy in the market economy is of a different character. A “chocolate king” has no power over the consumers, his patrons. He provides them with chocolate of the best possible quality and at the cheapest price. He does not rule the consumers, he serves them. The consumers are not tied to him. They are free to stop patronizing his shops. He loses his “kingdom” if the consumers prefer to spend their pennies elsewhere. Nor does he “rule” his workers. He hires their services by paying them precisely that amount which the consumers are ready to restore to him in buying the product. Still less do the capitalists and entrepreneurs exercise political control. The civilized nations of Europe and America were long controlled by governments which did not considerably hinder the operation of the market economy. Today these countries too are dominated by parties which are hostile to capitalism and believe that every harm inflicted upon capitalists and entrepreneurs is extremely beneficial to the people.

In an unhampered market economy the capitalists and entrepreneurs cannot expect an advantage from bribing officeholders and politicians. On the other hand, the officeholders and politicians are not in a position to blackmail businessmen and to extort graft from them. In an interventionist country powerful pressure groups are intent upon securing for their members privileges at the expense of weaker groups and individuals. Then the businessmen may deem it expedient to protect themselves against discriminatory acts on the part of the executive officers and the legislature by bribery; once used to such methods, they may try to employ them in order to secure privileges for themselves. At any rate the fact that businessmen bribe politicians and officeholders and are blackmailed by such people does not indicate that they are supreme and rule the countries. It is those ruled—and not the rulers—who bribe and are paying tribute.

The majority of businessmen are prevented from resorting to bribery either by their moral convictions or by fear. They venture to preserve the free enterprise system and to defend themselves against discrimination by legitimate democratic methods. They form trade associations and try to influence public opinion. The results of these endeavors have been rather poor, as is evidenced by the triumphant advance of anticapitalist policies. The best that they have been able to achieve is to delay for a while some especially obnoxious measures.

Demagogues misrepresent this state of affairs in the crassest way. They tell us that these associations of bankers and manufacturers are the true rulers of their countries and that the whole apparatus of what they call "plutodemocratic" government is dominated by them. A simple enumeration of the laws passed in the last decades by any country’s legislature is enough to explode such legends.

---

[1] Beatrice Webb, Lady Passfield, herself the daughter of a wealthy businessman, may be quoted as an outstanding example of this mentality. Cf. My Apprenticeship (New York, 1926), p. 42.

 

[This article is excerpted from "That Which Is Seen, And That Which Is Not Seen". It was first published in 1850.]

Have you ever witnessed the anger of the good shopkeeper, John Q. Citizen, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even 30 of them, by common consent apparently, offered the unfortunate owner this invariable consolation: "It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions. Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade — that it encourages that trade to the amount of six francs — I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen. If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.

Now let us consider John Q. Citizen himself. In the former supposition, that of the window being broken, he spends six francs, and has neither more nor less than he had before, the enjoyment of a window. In the second, where we suppose the window not to have been broken, he would have spent six francs in shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window. Now, as John Q. Citizen forms a part of society, we must come to the conclusion that, taking it all together, and making an estimate of its enjoyments and its labors, it has lost the value of the broken window.

Whence we arrive at this unexpected conclusion: “Society loses the value of things which are uselessly destroyed;” and we must assent to a maxim which will make the hair of protectionists stand on end—To break, to spoil, to waste, is not to encourage national labor; or, more briefly, "destruction is not profit."

What will you say, Moniteur Industriel? what will you say, disciples of good M.F. Chamans, who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?

I am sorry to disturb these ingenious calculations, as far as their spirit has been introduced into our legislation; but I beg him to begin them again, by taking into the account that which is not seen, and placing it alongside of that which is seen.

The reader must take care to remember that there are not two persons only, but three concerned in the little scene which I have submitted to his attention. One of them, John Q. Citizen, represents the consumer, reduced, by an act of destruction, to one enjoyment instead of two. Another, under the title of the glazier, shows us the producer, whose trade is encouraged by the accident. The third is the shoemaker (or some other tradesman), whose labor suffers proportionally by the same cause. It is this third person who is always kept in the shade, and who, personifying that which is not seen, is a necessary element of the problem. It is he who shows us how absurd it is to think we see a profit in an act of destruction. It is he who will soon teach us that it is not less absurd to see a profit in a restriction, which is, after all, nothing else than a partial destruction. Therefore, if you will only go to the root of all the arguments which are adduced in its favor, all you will find will be the paraphrase of this naive question — What would become of the glaziers, if nobody ever broke windows?

There are quite a few people who still think it was the "free market" or "Capitalism" that failed. On the contrary, it was the government, regulation and central banking that failed. Lets see what the dictionary has to say:

Main entry: cap·i·tal·ism
Function:noun
Date:1877
: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market

Hmm, no, we definitely never had Capitalism...Maybe this is what we have:

Main Entry:mer·can·til·ism
Function:noun
Date:1838
1 : the theory or practice of mercantile pursuits : commercialism
2 : an economic system developing during the decay of feudalism to unify and increase the power and especially the monetary wealth of a nation by a strict governmental regulation of the entire national economy usually through policies designed to secure an accumulation of bullion, a favorable balance of trade, the development of agriculture and manufactures, and the establishment of foreign trading monopolies

Ah, that sounds better! This crisis was caused by Mercantilistic (Keynesian) policies, not Capitalism. There is no 'flaw' in Capitalism. Allowing the free market to do its thing with minimal interference is the road to relative wealth and prosperity for all. A continuation of the failed policies of the Mercantilists will slow any potential recovery. Unfortunately it appears our omnipotent leaders have decided they want more of the same; indeed, it will be owed to what we have left of the free market when we eventually get out of this slump, not the actions of Rudd, Swan and Gillard which have been nothing but detrimental to recovery.

There's an excellent piece in today's Mises Daily by Chris Brown which highlights a lot of what I've been saying over the past several months: fiscal 'stimulus' is nothing more than a colossal waste of resources. Here's an excerpt:

"It turns out that Australia's Prime Minister Kevin Rudd is going around town breaking windows by, well, demanding they be built. There are over 35,000 construction and maintenance projects planned across Australia over the next 12 months. This includes AU$49 (US$39.4) billion dedicated to "nation building infrastructure," or crudely AU$2,200 in taxes for every man, woman, and child residing in Australia."

As long as people continue to believe that jobs are all that matter, we're doomed to repeat the mistakes of the past over and over again. Even if the 'stimulus' increased GDP in monetary terms and allowed us to stave off a technical recession, it will not create any additional real wealth or production in the economy; at best it will merely divert it.

Elsewhere, the RBA released their latest financial aggregates. Nothing too surprising in there, with monetary growth (M1, M3, broad money, money base, currency etc) all remaining about 15% YoY. Two noticeable changes were the increase in term and other non-government deposits by almost 30% YoY indicating that people are increasing their savings which is a good thing. A more worrying sign is that lending to the government by all financial intermediaries (AFI's) was up 273% YoY, a perfect example of the government squeezing the lending industry. At some stage the banks are going to have to increase the interest rates on their loans at which point the RBA will need to decide whether they a) sit back and watch (possibly raise rates too); or b) start printing money to keep rates down, thereby causing inflation.

Interesting times indeed...

Never in a thousand years would I have guessed that two industries with massive government involvement, namely Australia Post and Compulsory Superannuation schemes, are receiving flak for under performance. Hah!

AUSTRALIA'S superannuation funds recorded the second worst investment performance among the 30 OECD countries in 2008.

Forced superannuation tends to result in a misallocation of scarce resources to uses that are not optimal for many people. It's the classic "one size fits all" mentality that plagues all socialist policies; regulatory solutions that consequently stifle the free market's innovation and creativity and in the process restrict competition by raising entry costs. Friedrich Hayek referred to this as the "pretense of knowledge" syndrome infecting central planners. If the government really cared about its people it would stop meddling; order and fairness come out of the spontaneous interaction of thousands of voluntary free market transactions, not from latest political scheme concocted to win votes.

Our superannuation industry is heavily regulated by the government and hence utterly inefficient and wasteful. It's no surprise that they performed so poorly when the only people who gain are those who sit on the massive cash piles - and once you remove or make very difficult not to let them sit on the massive cash pile, the incentives to do well are virtually gone. On the contrary, you'll probably get calls from both the people on the pile and their governmental allies for increases in forced Super contributions!

The OECD Pensions at a Glance 2009 report also notes Australian seniors had the fourth highest rate of old-age poverty in the OECD in 2006, more than double the average.

"Public pension spending is only 3.5 per cent of national income in Australia compared with an average of over 7 per cent of GDP in OECD countries.''

This is a classic Argumentum ad populum, where "...if many believe so, it is so." Just because the rest of the OECD -- the ones who appear to have an old-age 'problem' that makes ours pale by comparison -- force their people to subsidise old age doesn't make it the right solution for us. In fact, the correct solution would be to abolish all future public pension spending and end this mess before it gets out of control (people currently on pensions should continue to receive it - this is a delicate issue and needs to be phased in slowly as the government promise of a pension has caused many people to alter their intertemporal preferences and hence over consume).

At the end of the day, the state's involvement in retirement security creates calculational confusion, resource misallocation, mismanagement and free riding. The real cost of the current mess will be borne by future taxpayers, who are paying for the pensions of the present retirees but can expect to receive little in return. As I've mentioned before (here and here), retirement and government pensions are a state-created concept full of economic inefficiencies, promoting waste and irresponsibility. We need to let people decide for themselves, to let individuals and families make rational and responsible decisions that enable them to provide for their old-age needs. Phasing out old-age benefits and returning to sound money so that people can actually save for the future would be a good start.

For the second part of this post, Australia Post is raking in the complaint letters! Consumers have no alternative as the government forbids competition so their only recourse is to complain; in a free market they would simply vote with their wallets and Australia Post would be out of business if they didn't clean up their act,

Australia Post received 65,000 complaints in 2007 about failures to redirect mail.

"Australia Post and its staff need to be a little more responsive to the problems that people can encounter," he said.

"[It needs to recognise] that this is a real problem for Australia Post and can cause real disadvantage and inconvenience to people is part of the solution."

Mr McMillan says the organisation's response to complaints also needs to be addressed.

This has been covered to death, but with no profit motive, I'm not optimistic that they'll address their "issues"...there's no incentive to!

As usual, with all of these problems, the simplest solution is often the best: get the government out of the way and let the free market work.

You can't make make this up: the government has decided to introduce new credit laws to punish "dodgy lenders". Not only does every lender now have to be licenced which in itself adds operating costs and red tape, but they're also subjected to laws requiring them to let borrowers "...request a variation to their credit contract if they suffered financial hardship." It's good to see that a voluntary contract between two parties is now worthless in this country. What's next, laws against usury?

It's always the same with the government: if the existing regulation doesn't work then just add yet another layer that strips even more liberties, adds more red tape, increases the costs for private enterprise and ultimately hurts the consumer, the very people they're trying to "protect". As interest rates rise thanks to cumbersome regulation and the inflation of the money supply, watch the government get even more heavy-handed in the loan industry. They will probably condemn lenders for charging "too much", like they can possibly determine what is "too much" or "fair" without the market's price mechanism. Then they'll force down rates, banks will stop lending (they'll probably simply invest themselves) and the politicians will "fight" the huge underground consumer loan industry they created that doesn't take your house, it takes your fingers.

The banks don’t prey on the poor. They offer them a service; no one is forcing them to agree to it. The price is right for them at the time they take the money, that’s perfectly legal. The right to buy or not to buy is vital to economic well-being and, of course, to personal liberty. Individuals need to be responsible for themselves and try to avoid the losses that result from mistakes. If people are constantly bailed out, the loss comes out of the public purse (or the lenders) and they are relieved of personal responsibility. They can then waste and lose just as much as their inherent laziness may dictate!

Remove all of the banking and lending regulation and allow the free market and competition to work. We're on a slippery slope to a place no one wants to go (politicians excluded) and these do-gooders who think they're saving the world are leading the charge, systematically removing individual liberties and freedom as they go. As Ayn Rand said, we support the smallest minority of them all: the individual.

The fast food chains have "voluntarily" restricted what can be promoted to children under the age of 14 - I'm sure there was no pressure from the government at all. As I wrote earlier this month, where does this end? When does the heavy hand of government stop deciding what's "in our interests" and what the "right choices" are? People used to say, sarcastically, when smoking was being "disincentivised", that the government would eventually even regulate what foods we're allowed to eat, something that is now a reality!

"Forcefully imposing your will on others through the use of government is never the correct means of achieving a desired end and will only result in further destructions of liberty and freedom down the road."

Smoking Police; Food Police; I wonder what the next target will be once fast food is outlawed or simply made too expensive to exist?

There's a great analogy in Thursday's Mises Daily by Llewellyn H. Rockwell Jr demonstrating how low interest rates alone will do little to "fix" the global economic crisis.

To understand the implications, imagine if a fine restaurant advertised a five-course meal and French wine for all comers — at $1 each. Would the customers be exuberant? You bet. They would be wild with anticipation, choosing to stand in a line and hang out at the restaurant rather than do other things with their time.

The restaurant would be packed and happy, though of course it couldn't sustain this in the long run, but the fun is great while it lasts. At some point, reality kicks in. The manager notes that there are no more tables and maybe no more food. The employees are exhausted. Moreover, the balance sheets don't line up: they are losing money on every meal they serve. At some point, the manager is going to have to announce the bad news and everyone is going to have to go home.

This is roughly what happened with the current boom and bust. Policy makers, however, seem to be under the assumption that they can keep the boom going on forever simply by dropping the interest rate ever lower. This is something like a restaurant owner thinking that he can continue to have people wait in line even though he has no tables or food or servers remaining. It is a physical and economic impossibility for him to make good on his promises.

At some point in this process, people begin to drift away and go on to other things. The manager can continue to advertise $1 meals in the hope of stimulating his business but this is simply illusion. No one is buying it; even if they did, the restaurant can't make the balance sheets work out. We can venture a prediction here that this restaurant will not be stimulated. It will enter into a prolonged period of inactivity until nothing is left.

Policy makers can lower interest rates as much as they like but at the end of the day, the only way they can maintain a rate below that of the market (the rate based on the pool of real savings plus risk, time and so on) is through increases in the quantity of money. They have to produce additional quantities of money and offer it on the money market (to banks) to maintain any downward pressure on rates at all - with the consequence being price inflation. This whole process is nothing more than wealth redistribution as each unit of the money supply is diluted and the new money is not distributed evenly; it inevitably reaches certain people first - the bankers, government, etc. These people can then buy more out of an unchanged supply of real goods which in turn increases money prices - the prices the rest of the population now pays with their depreciated dollar savings.

Increasing the quantity of money does nothing to benefit the economy as a whole but does benefit some; namely governmental officials, policy makers and bankers at the expense of everyone else, especially the poor and people on fixed incomes. Not only that but it deceives firms by distorting a very important price signal, encouraging malinvestment and sowing the seeds of the next crisis. Steve Horwitz provides an excellent summary, noting that by lowering the interest rate, it gives firms "...the impression that the public is now more patient and more willing to wait for consumption goods. Had the expansion of loanable funds been financed by genuine savings, the lower interest rate would be sending an accurate signal about the public’s wishes. However, when the expansion is caused by an excess supply of money rather than a shift in the public’s time preferences, the tight relationship between market rates of interest and underlying time preferences is broken."

If these Mercantilist policies of monetary inflation are maintained the question is not if we're going to have another recession after this one, but when.

As far as our political system is concerned, I'm not a fan. Left, Right, it's all the same, all part of the same corrupt system, the only major difference being from whom they take the money and to whom they give it. Then there's the independents and minor parties - in particular Nick Xenophon and Barnaby Joyce. They often hold the senate ransom to the highest bidder - in other words they sell their vote to whomever is willing to fill their constituent with the most plundered loot. Then there are the times they come up with various schemes and impose them on the population, the most recent being a move to stop petrol outlets from reducing petrol prices. Yes, you heard me: they're arguing for higher petrol prices and using "competition" to justify it!

Independent Senator Nick Xenophon and National Party Senate Leader Barnaby Joyce are combining to stop major oil firms and supermarkets from offering reduced petrol prices, in a bid to force out smaller competitors operating in the same locality.

The two senators are jointly sponsoring a private members bill which would require oil companies and firms, such as Coles and Woolworths, to charge the same price at two or more of their outlets if they are within 35 kilometres of each other.

Senator Joyce says the move will ensure greater competition and stop the larger operators from forcing out the smaller outlets and then charging whatever they want.

"This is a great step for our nation to make that," he said.

"We are piece by piece trying to build up a platform that says in our nation you have the right to go into business and not to be forced out by guerilla-like tactics of people around you."

Yikes. More like a great step backwards, Sen. Joyce! These two have obviously fallen victim for the neoclassic theory of competition where the only thing that matters is the number of competitors. Unfortunately the real world doesn't work exactly as the neoclassical models say it does - in fact, when the oil companies in 'cohesion' with the big retailers drive down the price of petrol it's a good thing as people now spend less of their income on petrol and therefore have more to spend or invest elsewhere, increasing their wealth and wellbeing. Yes, the smaller competitors will cease to exist because they are no longer competitive, but that's not necessarily a bad thing. The only way these "larger operators" can force out their competitors and then maintain their position is by improving their products and/or narrowing their profit margin to the point that competitors cannot enter. Whether or not they're charging above marginal cost is irrelevant; if other companies still can't compete, it's because their efficiency or productivity is such that it's not possible (profitable) to compete. This is a win for consumers who don't care who or how many firms provide them with their petrol, only that it's the cheapest possible.

These large firms are not able to "charge whatever they want", contrary to what Sen. Joyce believes. I think a real life example of how "predatory pricing" is nothing more than a myth that politicians use to justify additional regulation is called for here. I'll quote from Leeman in "The Limitations of Local Price-Cutting as a Barrier to Entry (1956)", who points out that Rockefeller himself failed to successfully utilise "predatory pricing":

"According to a widely accepted view, he softened up small competitors in the oil business by a period of intensive price competition, bought them out for a song, and then raised prices to consumers to make up his losses. Actually, the softening-up process did not work...for Rockefeller usually ended up paying...so handsomely that the sellers, often in violation of promises made, proceeded to build another plant for its nuisance value, hoping again to collect a reward from their benefactor...Rockefeller after a time got tired of paying..."blackmail" and...decided that the best way to hold the dominant position he wanted was to keep profit margins small all the time."

The reason large rather than small firms dominate so many markets isn't a result of "predatory pricing" but rather the result of taking advantage of economies of scale. They are then forced to maintain low prices for fear of potential as well as actual rivals. As long as competition is free, the only thing that can prevent this from happening is governmental interference.

Unfortunately Sen. Joyce and Xenophon missed this lesson. Thanks to their guerrilla-like tactics and the strong-arm of the government behind them, we are now forced to accept higher petrol prices than would exist in an unhampered market. A great step for our nation indeed!

It must be the most revered word ever uttered by a politician: "fair". All the people want is a "fair go"; a "fair wage"; "fair prices"; their "fair share"; a "fair deal"; ad infinitum. They use it every day to justify anything they please to cheers from the people. One policy where it is used without fail, which (almost) no one questions, is the progressive tax system.

Somehow a free society, one where individual property rights are vehemently protected, people are free to keep what they labour for, what they save, what they buy (i.e. their own property), is "unfair". Unsurprisingly, Professor Peter Whiteford from the University of New South Wales in last Friday's Australian Financial Review (AFR) reported that we now have the most progressive tax system in the whole of the OECD:

“Australia had the most progressive tax system in the Organisation of Economic Co-operation and Development, redistributing more tax from rich to poor than any other country.”

It's a good time to be poor in Australia, as the ..."poorest 25 percent receive 12 times the benefits of the richest 25 percent" while they contribute considerably less in tax (ibid). Of course, very few people are voluntarily in the bottom 25 percent. It’s the policies of government that encourages them to stay down there with generous welfare payments; minimum wage legislation; and an annual debasement of the currency of approximately 10-20%, creating a moving target that they're unlikely to ever reach. The government has effectively created a class that is solely dependant on the state for its very existence.

Here's a great quote from Lysander Spooner's No Treason No. 6: The Constitution of No Authority (1870):

"The highwayman takes solely upon himself the responsibility, danger, and crime of his own act. He does not pretend that he has any rightful claim to your money, or that he intends to use it for your own benefit. He does not pretend to be anything but a robber. He has not acquired impudence enough to profess to be merely a “protector,” and that he takes men’s money against their will, merely to enable him to “protect” those infatuated travellers, who feel perfectly able to protect themselves, or do not appreciate his peculiar system of protection. He is too sensible a man to make such professions as these. Furthermore, having taken your money, he leaves you, as you wish him to do. He does not persist in following you on the road, against your will; assuming to be your rightful “sovereign,” on account of the “protection” he affords you. He does not keep “protecting” you, by commanding you to bow down and serve him; by requiring you to do this, and forbidding you to do that; by robbing you of more money as often as he finds it for his interest or pleasure to do so; and by branding you as a rebel, a traitor, and an enemy to your country, and shooting you down without mercy, if you dispute his authority, or resist his demands. He is too much of a gentleman to be guilty of such impostures, and insults, and villainies as these. In short, he does not, in addition to robbing you, attempt to make you either his dupe or his slave.”

The only people who would lose in a truly "fair" system where people are entitled to reap the fruits of their labour are the politicians, their academic allies and the thousands of interest groups that exist solely to lobby the government for "favours". The progressive tax system along with other policies that target "fairness" or "equality" punish everyone from every income bracket, decimating productive activity by discouraging hard work and rewarding sloth and waste. If it is morally correct to forcefully take from some and give to others or to favour one party at the expense of another, where does it end? Would it not be better to just take everything anyone earns and redistribute it accordingly? The progressive economy we have is ever increasingly leading us down the road towards a command system. The whole moral compass or "fair go" justification for a progressive tax system is one big reductio ad absurdum, unless of course socialism IS the goal. One wonders if Julia Gillard ever gets elected whether or not she will take these logical steps and lead us into poverty, sorry, “equality”.

What is wrong with a system where the people who have earned money are entitled to keep it in its entirety? Surely individuals who have proven that they can best satisfy the wants and needs of consumers, who continually seek to make cheaper and better products than their competitors, can be trusted to provide benefits for "society" more than politicians who earn their stripes by conciliating pressure groups and supporting projects that will win them votes. Surely the entrepreneur who time after time risks his own money to finance products and drive down prices for everyone is better placed than a politician who never risks his own money and is always subject to bribes and corruption. Surely a system where savings and wages aren’t continually eroded is better than the constant debasement of the currency under the guise of maintaining a “steady price level” where inflation and unemployment often run rampant.

Abolish the income tax and return to sound money by taking the ability to inflate away from the Reserve Bank and the state. That is the key to achieving growth, wealth and a “fair go” for everyone, not more regulation and big government aimed at saving people from themselves.

The prevailing opinion on the streets is that capitalism has failed and the government is a necessary evil required to "fix it". This opinion is so well ingrained it's almost impossible to sway with logic and reasoning; indeed, people seem to be passionate in their hatred towards the "greedy banks" and support of "job creation". This all follows the media storm around the banks raising interest rates despite the RBA keeping rates on hold, with a follow-up RBA study indicating that, contrary to what the Commonwealth bank was claiming, funding costs have not increased.

The issue of the whole central banking system aside[1], why is everyone so worried about the banks charging an interest rate (which is the price of borrowing capital) higher than it costs them to acquire? That's like saying because it only costs a bookstore owner $5 to produce a book, they shouldn't be allowed to sell it for above $6, as that's a "fair price" and anything above that would be "exploitative" (as determined by some all-knowledgeable bureaucrat). Let's not lose sight of the fact that every exchange is voluntary and no one was or is coerced into borrowing money (government "incentives" to take on debt aside!). The real issue, of course, is the government intervention that prevents competitors from entering the banking business. As long as the government doesn't restrict competition, no one is able to either exploit labour or remain in a "monopolistic" or "cartel" position for long.

In other news, I also noticed that today's Financial Review (Australian Edition) contained an article showing that of the OECD nations, Australia has the most progressive tax system - we outstrip even the quasi-socialist European countries as far as wealth redistribution and welfare 'nanny' state goes[2].

Finally, I've updated the Recommended Reading section with some great books and essays which anyone is free to read or download. One in particular is "The Myth of the Failure of Capitalism" by Ludwig von Mises, a short essay addressing the fallacious views that the market and not the government is to blame for this crisis. Here's an excerpt:

The crisis under which the world is presently suffering is the crisis of interventionism and of state and municipal socialism, in short the crisis of anticapitalist policies. Capitalist society is guided by the play of the market mechanism. On that issue there is no difference of opinion. The market prices bring supply and demand into congruence and determine the direction and extent of production. It is from the market that the capitalist economy receives its sense. If the function of the market as regulator of production is always thwarted by economic policies in so far as the latter try to determine prices, wages, and interest rates instead of letting the market determine them, then a crisis will surely develop.

Click here if you would like to read the full essay.

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[1] I personally think we need a return to sound money and free banking to avoid political manipulation of the money supply -- which, by the way, has been increasing by almost 20% YoY for the past decade. I'll provide a nice chart showing this growth within the next week.

[2] As with the above, I plan to write about this sometime in the next two weeks.

One of the arguments I've noticed flying around the blogosphere lately by uninformed (I say uninformed because I do believe they've been legitimately misled by politicians and their court economists - this isn't entirely their fault) individuals is that the stimulus payments will help us fly out of the global financial crisis ahead of the rest of the world and put us in a great position to pay off the debt 'down the road'. These individuals have debated with themselves two perceived alternatives: one, to plunge along with the rest of the world into the depths of the global financial crisis; or two, take on (public) debt and 'stimulate' our way to prosperity, only to worry about the debt during the next 'boom' when it will be far easier to repay.

The first misconception, or fear, that we'll plunge further into the doldrums of the crisis if no 'stimulus' is undertaken by the government is only partially true. If the government sat on its hands but continued to take tax and other revenue from the people (while 'doing nothing'), less resources would be available for the people to spend, save and invest and therefore the economy would be worse off. The appropriate action for the government to take is an immediate reduction in taxes aligned with a cut in spending. This would provide the private sector with additional capital that they can then use in line with consumer preferences and 'stimulate' the economy (unlike government spending which is more often than not wasteful and not in line with preferences). The cash handouts issued by the government were nothing more than wealth redistribution disguised as good policy as the majority of tax revenue is collected from the top echelon of Australians, the very people who saw none of the stimulus.

While the fear of inaction is partially justified, the response of the incumbent government was not and is nothing more than political opportunism of the lowest form. At the end of the day, regardless of how many flawed economic models or cherry-picked statistics the government produces to justify itself, every dollar 'injected' into the economy must first be taxed or borrowed out of the economy. Thus, as mentioned earlier, it's nothing more than income redistribution. It does nothing to increase productivity or employment and therefore nothing to create additional income - and that's the best case scenario! More likely, government expenditure will weaken the private sector by directing resources toward less productive uses (e.g. more consumption and less productive investment) and thus impede economic growth.

Before moving on to the issue of deficit spending, I would just like to address one obvious argument that always seems to arise: that government spending takes from 'savers' and gives to 'spenders' which produces multiplier effects (more spending, growth), ad nauseum. To answer this justification of government spending, lets look at two types of savings (obviously there are more - real estate, shares, and so on, but that's irrelevant here): one, people simply hoard cash in their mattress; and two, people 'save' it in a banking deposit account. In the first case, the only way someone could believe that this would be bad for the economy (result in a 'deficiency' of aggregate demand) is if there exists confusion between 'money' and 'wealth'. If people accumulate money for the sake of accumulating wealth (e.g. stuffing it in their mattress never to be seen again), the price of commodities will continue to fall relative to money, therefore 'deficiencies' in aggregate demand will never result. If there is less money chasing the same number of goods, everyone else holding money will benefit through an increase in their purchasing power. The second case on the other hand is more straightforward, with any money deposited in banks being subsequently lent to others to spend. So regardless of what people do with their money it will be used!

To move on to the second claim that a deficit is not an issue because it will be easy to pay off in the future, let’s take a look at the area where there is an apparent "consensus" amongst economists: deficit infrastructure 'investment'. It's true, our highways are probably collapsing; our schools are dilapidated and badly in need of upgrades; and our public transport systems are third world. But the solution is not more tax dollars funnelled into this bottomless pit of bureaucratic waste. These services should be privatised: yes, roads, rail, buses, all of the so called 'social' infrastructure should be placed in the hands of the market, the only system that is capable, reliable and efficient enough to own and operate them. The fact that most people can't even consider private roads (beyond the token quasi-private toll roads) shows how effective the government run education system has been at manipulating and misleading people with false economics, filling the minds of entire generations with an inert fear of the market and into believing the fallacy of "public goods". Privatised infrastructure and the market price system - aligning investment with the preferences of the people rather than bureaucratic whims - is the only way to avoid further infrastructure waste.

That issue aside, lets examine the claim that infrastructure is one of the best ways to 'stimulate' the economy. The first claim is that it creates thousands of jobs, but one need not look far to show the stupidity of this idea. Yes, infrastructure will create jobs, but only because it is displacing them from where they are more urgently needed (it's impossible to tell if they are actually needed in infrastructure because that sector of the economy is socialised and is therefore guesswork at best - the price system is the only efficient method of allocating labour and capital). The only way the government can create these jobs is by taking money from the private sector, thereby replacing efficient jobs (that may well never be created) with inefficient and unsustainable jobs with the overall gain to the economy quite possibly negative! Only by chance can the government stumble onto a productive investment that increases future growth and productivity, but the amount of capital that is certain to be wasted in other projects will more than offset the potential gains.

The idea that these projects are justified because they're funded with borrowed dollars instead of tax dollars is equally ludicrous. The money from deficit spending has to come from somewhere and as the government produces no wealth of its own, we either have to print the difference, raise future taxes or do a bit of both - all of which hurts the economy. By borrowing, the government raises interest rates for the private sector, restricting the available capital for business. If they decide the debt is too hard to service with future tax dollars alone, they will start printing, resulting in inflation that takes real value away from the private sector and anyone who holds dollars. Whatever the government does to finance the deficit they will crowd out private investment and waste resources through countless pet projects, pork barrelling and other bureaucratic waste.

Finally, there is often a claim that there are "idle resources", in other words unemployment in the economy and that government deficit spending helps to re-employ them. The problem with this, as Henry Hazlitt clearly outlined, is that "...unless there were some serious lack of coordination among prices, costs, and wages, mass unemployment would not exist in the first place. When it does exist, the only appropriate cure is individual adjustment of prices, costs, and wages to each other - the return of coordination. But this can be brought about automatically only if the competitive forces of the market are given free play." Allowing these forces to work by removing their causes - government intervention - is the road to recovery, not the foolish notion that more wasteful debt and spending by government will somehow fix our economy.

When Wayne Swan claims that his spending will still be "flowing through the economy" for ten years, he's correct: his reckless spending will alter future economic growth for the worse. Economic growth results from producing more goods and services (not from redistributing existing income), and that requires real savings and productivity. We're going to be paying for the reckless socialist policies of this government for many years to come and only when people begin to realise the fallacies behind big government, stimulus and deficit spending do we have a chance at reversing this course.

Usually when I see the name 'Simon Crean' in the press I shudder slightly and wonder what kind of BS I'm about to read but on this (rare) occasion, he's actually correct.

"I do not have a problem with a branding exercise that promotes as a marketing tool why [an] Australian product is good quality, value for money, because there's plenty of things we can promote in that regard."

"There's lots of markets we can't get into, and that's why we have to spend so much effort breaking down those markets and getting access," he said.

"We won't do it if we join the downward spiral to protectionism, and mandating the purchase within a country is protectionism; pure and simple."

Now, he's correct in that there's nothing wrong with a branding exercise - anyone should be free to start their own 'Buy Australia' marketing campaign - but the government should avoid getting involved. Unfortunately I think that, on the contrary, Crean is implying that the government will provide assistance to this campaign, which amounts to nothing more than a subsidy to local producers. These are the kind of indirect subsidies that often 'slip through the cracks' as most people are completely ignorant (due to a lack of economic understanding) towards them. Indeed, they quite often blindly support them under the guise of 'nationalism'. What I want to know is if people really care, why don't they campaign for voluntary funding? Surely that's better than forcefully taking funds from the population, many of whom will see no benefit at all from the campaign.

As far as the anti-protectionism stance, kudos to Mr. Crean (although one has to question his motives - resource revenue from China, in other words more money for his trough, and the possible backlash that could occur perhaps?). I wish the same could be said for his new apprentice, the young 'up-and-comer' and new Employment Participation Minister Mark Arbib (yikes, you can't make this stuff up), is "...listening to union demands for a 'buy Australia' policy". I used to have the misfortune of occasionally watching him talk before work (daylight savings shifted the programming!) and disagreed with almost everything he had to say - mind you, I wasn't agreeing with the Liberal representative either. I fear if he gets anywhere near policies that promote "jobs" or "local industry" or (insert union rhetoric here), he'll be quite successful at dragging our economy through the mud. I think Comrade Rudd even has him lined up as a future Labor leader - what a scary thought!

Every day we see examples of people automatically resorting to the law and the cold hard fist of government regulation at the first opportunity without even considering that perhaps, just maybe, they should simply take some personal responsibility for themselves. In this example, I’m speaking of a report released today that "...reveals that more than 50 per cent of people surveyed [survey of 800 adults] support a ban on junk food advertising that targets children". Not only that but apparently 9 out of 10 people surveyed want more government regulation associated with the "...use of toys and cartoon characters as advertising tools". What I want to know is why are people always so willing to give up more and more personal liberties to achieve their own selfish, subjective goals? Who decides where the endless regulation ends; at what point do we cease trying to control people as if they're nothing but mindless robots who can't make choices for themselves? This brings me to a statement by the Director of the Public Health Advocacy Institute, Mike Daube, who says that "...the health of children needs to come before profits",

"This survey puts the junk food industry on notice that it has to reduce the vast amount of promotion that is just swamping us," he said.

"Any survey that tells you that over 90 per cent of people want action surely has to tell the junk food industry this the time to back off."

The problem is that just because the majority of people in a survey by the Obesity Coalition (one can’t but wonder how the questions where phrased and what the demographic of the people surveyed was) want more regulation doesn’t mean it’s the correct policy. As Mises would say, that a fact is deemed true by the majority does not prove its truth. Also, wouldn’t the only logical way to protect kids completely from ‘junk food’ be to either ban the products altogether or resort to the method the Soviets used and simply ban any kind of advertising or marketing, with just generic products remaining? Those issues aside, let’s examine this a bit further.

One, advertising does not possess the coercive power that Mr. Daube thinks it does; it can’t force products on the children of the world. Advertising is not selling; it’s a mere statement of words. When on the one hand, selling a product to a child without the parent’s consent or contrary to the parent’s wishes constitutes a violation of the parent’s rights (as legal guardians), statements of words - provided they do not constitute fraud - do not violate individual rights. Therefore, the mere statement of words, including statements used in advertisements, should be free of legal restraint.

Two, it should be the parents responsibility as to what their children should and should not do and not that of the state. The parents are the ones who are responsible for their children. They raise them until they’re able to take care of themselves and in the process they are responsible for what their children eat, what they wear, what they do before and after school, what they watch on television and what they buy in stores. If parents don’t like what their children are watching on television, then it’s their responsibility to turn it off. If parents don’t like or approve of what their children are buying, it’s their responsibility to stop such behaviour, certainly not the governments.

Three, in a free market no marketer or advertiser can survive without two key values: favourable word-of-mouth communication and repeat purchasers. These are derived from providing a quality product and engaging in honest dealings and result in goodwill or a favourable reputation for the product or business. It’s the competition for this reputation that protects consumers from unscrupulous, devious and manipulative advertisers and salesmen. An excellent reputation is something every business strives to achieve – it takes years to earn, by satisfying customers repeatedly through honest dealings and quality products. Not only that, but if the state regulators didn’t intervene, I’m positive there would exist far more ‘independent regulators’, private enterprises that test foods and give them their ‘stamp of approval’, providing an indicator for customers (there are examples of this already, although for them to work properly they have to be free of political and regulatory interference – we don’t want a repeat of the debacle that was the rating agencies involved in the financial crisis!).

Finally, no one is "forcing" these kids (or rather, their parents) to buy these products. To suggest that man is nothing more than a mindless automaton that responds only to impulses and possesses no free will is absurd. People are free to choose whether to accept or reject a product by a company and don’t need some greater authority imposing their will, their own subjective values, on others.

Contrary to what Mr. Daube believes, the profit motive is the best way to improve the health of our children, not regulation, for all parents need to do is adjust their buying preferences towards healthier products and the producers, the entrepreneurs, will respond accordingly to fill this void. This is because, despite the best efforts of the government to prevent it, the capitalist mode of production excels in supplying the ever changing demands of consumers with more, better and cheaper goods in line with their preferences. If 9 out of 10 people did indeed want junk food advertisers to cease targeting their children, they should simply stop buying their products. Forcefully imposing your will on others through the use of government is never the correct means of achieving a desired end and will only result in further destructions of liberty and freedom down the road.

While trawling the endless sea of information known as the internet you occasionally stumble upon a piece of work that 'jumps out' at you. Now, this isn't always in a good way: more and more often, especially in the midst of one of the largest global crisis's we have experienced, the socialists tend to show their true colours. You know the type, the one's who would never fully endorse free markets or capitalism, the ones who would always support additional regulation and 'favours' for interest groups no matter how ridiculous, while simultaneously claiming to be 'conservatives' or 'believers' in the free market. They see this as the perfect opportunity, the self-professed 'failure of capitalism' (when we all know that's not true), to spread the misery of socialism to us all. That's the true difference between advocates of laissez faire and big government: the former refuses to use, and fights against, the use of coercion on markets and individual liberties while the latter encourages it and actively seeks it.

The essay in question is a mammoth piece by Thomas Geoghegan, a Labour Lawyer, entitled "Infinite Debt - How unlimited interest rates destroyed the economy", published in Harper's Magazine (April 2009). The essay itself is far too long to reference or refute line-by-line here, but rest assured it's packed to the brim with a mix of fallacies, confusion, misunderstanding, emotional pleas and just plain old socialist drivel. In this article I will address just the final part of his essay, his 'five point plan' (no doubt a subtle reference to the five year plans of the communist countries?) for the United States.

"First, we have to pass a new type of law against usury that accepts the world in which we all live now. The saintly Illinois Senator Dick Durbin has proposed an amendment to the National Banking Act, to put a cap on interest at 35 percent. But that would let too many banks go on as before. Here's an alternative: let's cap interest at nine percent, then let a federal agency give exemptions to applicants - banks - that want to raise rates up to Durbin's limit (I would stop at twenty percent)."

"To get the right to this higher rate of twenty percent, however, the bank would have to demonstrate each year, to a federal agency, that it has a reputation for honesty and fairness and that it had not been found guilty of any fraudulent or bad-faith practices, such as the use of hidden fees or charges, or the unfair garnishment of someone's pension. I'm aware that this standard is vague. I suppose few licenses would be denied. But the very existence of this procedure - and the right of you and me to email our gripes to a federal agency with the power to exert extreme pressure - would have a chilling effect on banks and keep them from getting too near unconscionable conduct or charging the highest possible rates."

This first plan is particularly easy to refute, but first lets touch on the issue of usury, for the author attacks this concept throughout the entire essay. The definition of usury is interest on a loan. It’s perfectly natural and lawful and is as mutually beneficial to the borrower as it is to the lender. To assert that someone who has produced capital should then lend it out for free, without compensation (or at a rate of compensation lower than they deem fair), is preposterous.

Mutual, beneficial, voluntary exchange between two consenting individuals is perfectly fine. If they were coerced into accepting the contract then the contract is void, that’s called fraud. If not, then who is the author to decide what people should and shouldn’t be allowed to do? The owners of the capital are free to charge whatever they please: it’s their property you’re trying to borrow. If the author has a problem with it, he’s free to open up another payday stand next door and charge a lower rate of interest. This will do far more damage to the currently operating businesses than any amount of legislation, while simultaneously benefiting the customers, much more completely and efficiently than any amount of legislation. It would also be much cheaper than having the state enforce the regulations, with inspections, arrests and prosecutions. The only reason no one is opening competing loan businesses is because it's highly likely that they would lose their capital: they're not being compensated sufficiently for the risks they're taking with their property.If the government prevents someone from competing, well then there’s the problem! Legislative mandates on interest rates will simply result in the closure shops and leave customers without the service they want at a price they are willing to pay.

Back to the proposal, if this was put into law capital accumulation would fall to disastrous levels as there would be no interest in keeping it, slowing growth and progress significantly. If I have a dollar and someone wants to borrow it, I should be compensated for it. In the time you’re using that dollar, I can no longer use it. If someone forces me to loan it to you interest free, or at a rate below what I feel is fair, it represents a loss to me and a gain for you. When someone asks for a loan, they’re requesting a service. The lender has a right to refuse, or to require, as compensation, an equivalent service.

If the interest rate was forced downward by the recommended law above, the result would simply be a cap on the interest rate below its market-clearing level. What would happen? There would be an obvious and immediate shortage of credit. Not only is this inconsistent with intertemporal consumption preferences but it prevents the freedom of choice and destroys individual liberty. The banks don’t prey on the poor. They offer them a service; no one is forcing them to agree to it. The price is right for them at the time they took the money, that’s perfectly legal. By putting a cap on interest rates, they deprive the poor of this service, because no one would lend them a cent (see above). "If a man drinks wine and not water I cannot say he is acting irrationally. At most I can say that in his place I would not do so. But his pursuit of happiness is his own business, not mine." – Ludwig von Mises

"Second, we should have state-owned banks like the German banks known as the Sparkasse. Maybe each of the fifty states could charter its own bank. Each would issue credit cards at a rate much lower than what the private banks charge. Also: no fees at cash machines, no oppressive collection cases, no gratuitous destruction of people's credit ratings. The catch is that, as in Germany, the US Sparkasse would lend only to the most creditworthy people. That is, the state banks would set benchmarks not only for how the private banks should behave but how the people should behave as well."

Absolutely not. I gather he wants to appoint the boards of this “bank” and provide them with their funds by direct subsidies and by guaranteeing their investments with state bonds. This would, undoubtedly, lead to state-favoured businesses getting the majority of the “loans”. The burgeoning state control of business would swell the state bureaucracy and lead to widespread centralisation and corruption. Small businesses would fail and have their assets swallowed up by big businesses and big banks. No one would have to cater to consumers, just to bureaucrats (that’s how you would be one of the “creditworthy people”). Eventually socialism would ensue. Don’t believe me? This is almost, to the word, what the Italians did as they became enveloped in socialism before the second World War. I believe they call it Fascism.

"Third, we should have at least one or two "public guardians" as directors at the banks and other financial firms we have bailed out with $700 billion in taxes and all the money the Fed has printed. Every financial company into which we have "injected equity" should be required to have government-appointed directors, up to a third of the board. We can use these directors to nudge (if not dictate) what the banks and firms should do. For example, the directors should work to bring down credit-card rates. Through guardians, we can lower rates, bank by bank, by moral suasion and a certain built-in pressure rather than by external decree. The guardians should also demand of us good character if they bring down the rates. "Our directors" should help push capital into manufacturing. Of course, there has to be a reasonable profit, but sometimes a reasonable profit can be three percent instead of thirty percent."

I believe I covered this in the above paragraph. Welcome to communism! Enjoy your journey into poverty and the removal of human liberties! These policies will do wonders at making rich people poor, but they will do nothing towards make poor people rich. Indeed, most of these 'plans' would likely send us back several decades at least. On the issue of "public guardians", I believe Mises summed this up appropriately, "...if one rejects laissez faire on account of man’s fallibility and moral weakness, one must for the same reason also reject every kind of government action".

"Fourth, we should require the banks we bail out to cancel an appropriate amount of consumer debt - especially in instances where people would have paid back the principal by now had the interest rate been more reasonable. My retired schoolteacher, the one with the husband who is deep into Alzheimer's and who has already paid $3,000 on a $1,700 loan, should be let off the hook. The banks we have bailed out should follow the Golden Rule: just as their own debts have been written down or paid off, so they in turn should do unto others."

Here the author tugs on the heartstrings in an attempt to get someone out of a legitimate, binding, mutually voluntary and beneficial contract. People who produce goods can display them for the inspection of the buyer who is, at all times, free not to buy. The right to buy or not to buy is vital to economic well-being and, of course, to personal liberty. He is trying to turn this around, as if some authority, claiming to know what the people want, issuing orders for supply without being able to know the requirements of the buyers! This is how all the mess starts and is why no one saves – individuals need to be responsible for themselves and try to avoid the loss that results from mistakes. If people are constantly bailed out, the loss comes out of the public purse, and they are relieved of personal responsibility. They can then waste and lose just as much as their inherent laziness may dictate!

Don’t bail out the banks and don’t bail out the debtors. Bankruptcy exists for a reason. It’s the most effective way to reallocate resources in line with preferences, thereby reducing waste and hastening the recovery process.

"Finally, we should think about ways to "inject equity" directly into the accounts of working people rather than into banks. The best way to do this is to announce a plan to raise the gross replacement rate of Social Security from 44 percent to something closer to 65 percent, which is still short of the rate in many European social democracies. We can afford this as much as or more than they can."

"We could aim to reach that goal gradually, over the next twenty years, but even announcing the goal encourages future-oriented thinking. It would encourage people to believe that they could invest in real things again, instead of pinning their hopes on the false and predatory promise of a big, Vegas-style payout. The promise of a real public pension that people can live on would lead fewer of us to chase bubbles in good times, even as it gave all of us the confidence to keep spending when times were bad."

How? By printing more money? There's a huge disincentive to save in our society with the constant debasing of the dollar, debtor bailouts, heavy taxes and so on. Rather than forcing people to save (super) or providing them with a pension and other benefits (social security), a return to sound money so that savings aren't forever eroded (indeed their purchasing power would increase over time) would be a good start.

"Schumpeter feared that this kind of countercyclical thinking by people on the left would lead to a stagnating form of socialism, or even the end of capitalism, But socialism, in the state-run form he anticipated, is not inevitable, or even desirable. Social democracy, European-style, which Schumpeter did not expect, is desirable. Sure, I'd like the European governments to run up a bit of public debt to pump up demand over there - I don't think that's so immoral. What's immoral is to pump up demand, as we have, by handing out easy money at high interest and driving people into debt."

"Even in Babylon they spared people that kind of captivity. We now have to ensure our own country does the same."

This final section is full of fallacious arguments. He’s just dropped them everywhere. The problem is that to 'refute' all them (e.g. disprove socialism) requires far more time than I’m willing to give to this guy, especially as he hasn't justified any of his ideas with even an ounce of economic sense or theory, so I’m going to simply respond in kind: no, public debt is immoral; and yes, your policies WILL lead to socialism, wealth destruction and impoverishment. While it’s not inevitable, if people in positions of power are at all influenced by you, I fear for the worst. I’ll end with this: "As soon as we surrender the principle that the state should not interfere in any questions touching on the individuals’ mode of life, we end by regulating and restricting the latter down to the smallest details," – Ludwig von Mises.

Have a good weekend, and while you're out enjoying the many benefits that capitalism has enabled, be thankful that people such as Thomas don't yet have the necessary power to impose their will on others. While we have definitely moved further towards his dream of a socialist state in the past year, it's still early days and we can reverse the damage already done.

The latest GDP figures and the responses from our 'leaders' reminds me of Thomas Dolby's 1982 song, "She Blinded Me With Science," referring of course to the colloquial British concept of deliberately confusing someone (in this case, multiple people) by giving the impression of highly complex knowledge. Mr. Rudd dropped this today in response to a 0.4% growth in the GDP figure:

"Today's figures demonstrate that the Government's economic stimulus is working and it is positioning Australia as the best performing economy in the world," he said.

"Had we pursued the strategy recommended by [Opposition Leader] Mr Turnbull - not to invest and not to provide cash payments to pensioners, carers and others - Australia would be in recession today."

Even if the stimulus is the reason GDP recorded a small gain (it's quite probable), that's not necessarily a good thing. GDP is one of those figures that measures all spending, regardless of how destructive it is. In other words, the government could just as well build hundreds of battleships, have a fight to the end in the middle of the ocean until one remained, and GDP figures would record impressive gains thanks to all of that spending. The question we need to ask is this: are we wealthier for it? Are we wealthier for the billions of dollars that were squandered on plasma TVs and the like instead of being saved and invested productively? When I say productively, I mean expenditure for the purpose of increasing future consumption, an expansion in the capital base. Government expenditure -- and 'stimulus' payments, are usually (if not completely), squandered on unproductive expenditure, or destruction of the capital base. While both of these will show up in the GDP figures, only one actually improves the wealth of the nation.

So while the politicians can slap each other on the back and take "credit" for further destruction of real wealth, try to look beyond the statistics, most of which have a built in bias towards disguising the true cost of government and over-counting benefits.

I’ve been thinking quite a bit over the past few days as to why the people in charge and the leading economic “thinkers” consistently fail to see the real, fundamental causes of the current crisis. The guys in charge are smart people – they wouldn’t be where they are if they hadn’t proved that. I think the reason lies somewhere deeper than that, that it must lie in their failure to reject the axiom of "government exists to serve the people," and therefore by deduction legal plunder by government is justified for the good of society. If they were to reject this axiom, then the blame would begin to be apportioned to the right people and this is a risk that governments aren’t willing to take. As Mises said,

"It is impossible to invalidate the economists demonstration that all privileges hurt the interests of the rest of the nation or at least a great part of it."

Indeed, it is impossible to refute these demonstrations, unless you maintain the above – and incorrect – axiom. For if you believe that government, by forcefully "helping" a few people is justified in their impoverishment of the rest of the nation, then your entire idea of what is “valid” takes on a different definition as well. Any decision is automatically justified when this axiom is upheld; if you create 100 jobs for troubled teens by robbing a few wealthy farmers, the decision is “justified” and “proof” that government is a necessary evil. Even if the economist can demonstrate that while the money taken has created 100 jobs, it has likely cost 150 other jobs (government created jobs are always less-optimal than private created jobs and thus there is a deadweight loss to society) from ever being created, they will still vote for the policy anyway (well, everyone except for the farmers!). In their minds they have done the right thing, when in reality they have wasted resources and prevented 50 people from obtaining productive work. As Thomas Woods said (cited in Jeffrey Tucker here), “the reason people miss fundamental truths about economics is that economic thinking usually requires at least two steps of logic to arrive at truth, whereas the common man is only willing to take one step at most.” But this doesn’t explain why professional economists, highly intelligent and very well paid, fail to take this second step; they fail to move beyond the axiom of government and therefore miss the real economic truths.

So perhaps this is the reason why they come up with endless cock-and-bull theories of economics to try and explain something that is so obvious. There “must” be a better way they say; there “must” be a way government can fix all of the woes of society, when the real culprit is staring them in the face. They don’t even consider that the axiom they start every thought process with is incorrect. Take this recent example, a speech given by Luci Ellis, head of the RBA’s “Financial Stability Department” (what an amusing name!), where she spouts fallacy after fallacy, trying to find the real cause, because she simply can’t even comprehend that the real cause is in fact herself and her fellow government officials across the globe:

"Perhaps the most basic underlying driver of the crisis was the inherent cycle of human psychology around risk perceptions."

It’s fair enough that people will lose confidence once they realise they've been duped into believing the pool of capital was larger than it actually was but it's hardly the "driver" of the crisis. So she assumes that human psychology operates in "cycles" and this must be the cause of economic fluctuations!

"But there is also recognition in many quarters that low interest rates were not – and shouldn’t be – enough to cause such a crisis on their own."

In other words, the central bankers of the world have decided that they're not to blame (of course lots of other factors were involved, but this was the main culprit).

"A lack of appropriate financial regulation in some countries is widely regarded as one of the important causes of the crisis."

Sure, you undertake "quasi-deregulation" but stay heavily involved in market manipulation, maintain control of rating agencies and so on. She concludes that we obviously need more regulation rather than less government tinkering!

"Perhaps most crucially, many internationally active banks failed to perceive, or appropriately manage, the risks involved in certain financial products and markets, and regulators did not make them do better on this front."

When there's massive credit expansion, no risk of a bank run, no personal repercussions for the people in charge, obscene cases of moral hazard...she wonders why risk is priced cheaply? Of course, as above, the solution is better regulation. If only the right people were in charge!

"In this environment, banks’ perceptions of risk increased, and they started to tighten lending standards. A feedback loop started to develop. Banks were becoming more risk-averse, but so were their customers, who started to pull back on spending. The major industrialised economies of the United States, euro area and Japan were already experiencing economic contractions by the first half of 2008."

Yes, so banks and consumers alike realised that they were living a lie, they found out they had been duped by the central banks and government of the world and, gasp, started to accumulate capital in an attempt to restore the wealth that was destroyed in the boom?

"However, it appears that good quality borrowers can still obtain and roll over credit."

As they should be able to...it's the marginal borrowers who were only able to stay in business because of the low interest rates that need to fail for economic health to be restored.

Her "countermeasures" are too long to list here...but they basically involve bailing out the entire financial sector to restore "confidence". She wants to "de-risk" everything. Finally, she wants to increase regulation across the board...because now they're so much wiser, they won't possibly get it wrong again.

I think she honestly believes that the only reason we had this crisis was because people decided they'd had enough which triggered the vicious "feedback cycle". Then to fix it, simply restore confidence and you'll get a "reverse-feedback cycle" and we can start another "cycle of human psychology?" It sounds fantastic doesn’t it; it’s so simple, and allows her to step back, wipe her hands clean, and get a good night sleep now that her conscience is clear.

Personally, I can't support a system of economics that operates with the above axiom, that "hurts the interests of the rest of the nation" to support certain interest groups. I believe that economics should seek to identify actions that can "benefit the interests of the whole nation." To me, economics is therefore one and the same with individual freedom, justice and liberty. What is it going to take for the people who maintain the “government” axiom to take the second step of logic? I honestly don’t know, and even if they do, most are paid far too handsomely (in the case of economists) or already rely far too much on the welfare state and productive labour of others to start doing something about it now.

Continuing in the same vein as the previous post, the unions are protesting a two year delay in the aged pension as announced in the recent federal budget,

The Federal Government is facing a protest from two of the country's biggest blue-collar unions against its plans to raise the pension age to 67 by 2023.

The Construction, Forestry, Mining and Energy Union (CFMEU) and the Australian Manufacturing Workers Union (AMWU) say it is unpalatable to expect people in arduous jobs to work to that age.

The pension age increase was announced in the Federal Budget and unions say they will fight the decision.

Is anyone surprised? Union officials deciding to fight a measure that will delay their opportunity to feast at the public trough by two years. That's expected though and isn't the real issue here: government and the pension itself. The two year delay is a classic knee-jerk response to the looming old-age crisis and while the government can claim it's a "responsible reform to meet the challenge of an ageing population and the economic impact it will have for all Australians" until the cows come home, it's a policy that will, at best, keep the system running for a few years longer. Unfortunately it does nothing to address the real problem: artificial disincentives to work and save and a heavier reliance on the welfare state.

Why does the government feel the 'need' to get involved in welfare? Quite simply because they created the 'need' to. While in the past family, markets, mutual aid, charity, and work (savings) were ways people provided for themselves, the lure and security of the trough has removed or severely diminished most of those. The whole thing is just one big contradiction: on the one hand, government forces companies and individuals to contribute to a super fund, bemoaning a lack of savings and the looming crisis, while on the other hand they're firmly committed to a policy which continuously diminishes the purchasing power of the dollar! While hypocritically pretending to fight inflation, they encourage massive amounts of credit expansion and constantly increase the amount of money in circulation. There is simply no incentive for the average Joe to save when the government will simply inflate it away (and psychologically obscure this danger with the 'security' of a pension).

Old-age security is too important to be left in the hands of the state but the first step to fixing it isn't to simply delay the pension age. The solution is to bring back incentives to save, cease debasing the dollar and put some responsibility back into the hands of the people. The unions can fight for the pension all they like, but if by the time they hit 65 or 67 it's worth considerably less (as far as purchasing power goes) and reduces them to near-poverty, they might find that the old-age 'security' the state provides them and unions 'won' for them isn't so secure after all.

Here's a perfect example of why a "retirement age" is is just another invention by the government along with unions and other interest groups who want people to exit the workforce before their time that amounts to nothing more than a big waste of resources,

British adventurer Sir Ranulph Fiennes has reached the summit of Everest on his third attempt at conquering the world's highest mountain, a spokeswoman said.

The 65-year-old arrived at the top of the 8,848-metre peak just before 10:00am (Australian time), she said.

He began his latest attempt to climb the mountain three weeks ago, according to the BBC, and now becomes the oldest Briton - and the first British pensioner - to scale the mountain.

Joking about his advanced age, which in Britain brings free travel on some public transport, Me Fiennes was quoted by the BBC as saying: "It's amazing where you can get with a bus pass these days." -- Source

If a 65-year-old can climb Everest, surely people can keep working (especially desk jobs!) well into their 70s and beyond. Rather than just play golf and watch TV all day they could be using their skills productively. That said, everyone should have the option to retire, regardless of age, but the government should stop providing endless incentives to exit the workforce once you turn 65 (pensions, discounts, access to super, and so on).

It goes much deeper though -- there's a huge disincentive to save in our society with the constant debasing of the dollar, debtor bailouts, heavy taxes and so on. Rather than forcing people to save (super) and providing them with a pension and other benefits if that's insufficient, a return to sound money so that savings aren't forever eroded (indeed their purchasing power would increase over time) would be a good start to bringing back some incentive to save.

I love how Kevin Rudd justifies his decisions. Here are two perfect examples of deflection and utter nonsense:

From The Age,

[Responding on criticism that the budget is too large] "Australia's net debt will be the lowest of any major advanced economy in the world for the next decade."

From the ABC,

[Responding to the $2m spent on travel during the parliamentary winter break last year which he tried to hide by releasing on the same day as the budget] "I would say that Mr Howard's $20 million travel arrangements when he was prime minister, which have been defended by Mr Turnbull this morning, are quite clear."

"The benchmark - which has been established by the previous government - we've acted within that."

Classic deflection. Has it honestly never occurred to these clowns that just because someone else is doing it or did it in the past doesn't make it right? It's the old childhood story your parents tell you, "if your friends jumped off a cliff, would you follow them?" I can't believe that this defense holds up to any kind scrutiny, the media is really doing a poor job of critiquing Rudd's policies. Are people really so obsessed with left vs right, labor vs liberal that they can't see that, maybe, just maybe, they're both wrong?

The crisis we face today has revealed how backwards Australian economists really are. There exists a serious, fundamental problem in the way economists are trained in Australia. I cannot fathom any other reason as to why, when economists in other nations (albeit a minority) can see the problems we face so clearly, yet in Australia the "contrasting" opinions are so confused. All of the debates in the media, regardless of political spectrum, always make the same assumption: that government is the solution; that it is a necessary evil to provide us with prosperity. I hope to show, as briefly as possible, that this assumption is unfounded and is indeed detrimental to our prosperity, freedom and liberty.

For the basis of this argument, I'm going to look at a recent article by the ABC entitled "Economists tackle the deficit and debt debate", which supposedly shows some contrasting views from well-known Australian economists. The article begins with a witty quote, stating that:

"It is said that if you put ten economists in a room you will get eleven different opinions."

"This has certainly been true of the federal budget analysis, with rare exceptions such as the general support for the Government's increased infrastructure spending."

The article takes opinions from three economists: Dr Stephen Kirchner, an economist from the Centre for Independent Studies think-tank; Professor Bill Mitchell, the director of Newcastle University's Centre of Full Employment and Equity; and Associate Professor Steve Keen from the University of Western Sydney. I'd like to address the fallacies, indeed the dangers, of taking the advice of these vastly contrasting "economists".

Dr Stephen Kirchner

Our of the lot, Dr Kirchner is probably considered the "free market" economist, or at least the closest thing to it, but even he fails to see that a deficit was not necessary.

"There's no question that we were going to go into deficit, and this was necessary to soften the blow from the global economic downturn," he said.

"But it is a question of degree, and overall about two-thirds of the deterioration in the budget balance is due to slower economic growth, but about one-third is due to discretionary policy actions which have made that downturn in the budget even worse."

The best way to soften the blow from the global economic downturn is to remove the cause, not treat the symptoms. Yet Dr Kirchner, indeed none of the economists mentioned in this article, seem to understand what the cause was: the manipulation of the market by the central banks of the world and their enablers, their governments. A decline in government revenues isn't an excuse to increase the size of government, relatively speaking, to that of the private sector. Dr Kirchner continues,

"I don't know that there's been much evidence to suggest that there's been a positive impact on employment creation from the fiscal stimulus packages."

"There's a long-run crowding out effect from government borrowing that will probably persist well after the recovery is underway," he said.

In this, Dr Kirchner is only partially correct. The stimulus packages did create jobs, it boosted the retail industry, the construction industry and many others connected to them. It's fantastic; indeed wonderful, to see this marvellous plan succeed in creating jobs for the people! But one has to ask, where did the government get the dollars to pay for these jobs? It had to tax from other people, people who you never see. The $900 it took from Joe the businessman to pay for Steve the construction worker is now $900 that Joe never gets to spend: he may never buy a new suit, costing the local tailor work; he may leave his garden unkempt, costing the gardener work, and so on. So not only is Joe robbed, at a loss of $900, but the many industries he would have spent it on also suffer, not to mention the net loss incurred through the layer of bureaucracy that was involved in the redistribution process. There is no reason why Steve should deserve more sympathy than the tailor or gardener who no longer have jobs. The "stimulus" is no more than a mere displacement...there is no net gain to the economy.

As for the long-run crowding out effect from government borrowing, Dr. Kirchner is correct. Any money they government sources - whether from tax, borrowing, or inflation - is now money that the private sector, the people, no longer have.

Professor Bill Mitchell

Prof Mitchell, unfortunately, epitomises the state of academic economics in Australia. He believes that government is the solution to all of our woes, that it is this great almighty utopian being that can do no wrong,

"[if the government didn't intervene] There would have been a very severe economic contraction with much more substantial unemployment, much higher negative GDP growth rates, and we would have really regretted it."

"[on the 1990s recession] They allowed the recession to occur and deepen before they intervened, they intervened very late and, as a consequence the economy was already starting to turn, that is grow, before they really started to pump money into it," he said.

"We had a very tepid recovery, and unemployment kept rising for several years after that, and it took us nigh on 14 years to get the unemployment rate back to where it was before the '91 recession began."

Everything the government does is contradictory in one sense or another. If it seeks to aid one industry, it must take from another industry. It's at best an illusion that everyone can live on the back of everyone else. The government can never restore more to the public than it has already taken. It's an impossibility for it to confer a particular benefit upon an individual, or group of individuals, as part of a community, without imposing a greater cost upon the community as a whole.

On the basis of the above, how can Prof Mitchell possibly, logically, justify his case that government can reduce unemployment or boost the wealth of Australians (to be fair, he mentions GDP, which includes government expenditure and not the costs associated with it, so the government can "boost" that statistic)? He can't, so he resorts to the following,

"The Government does not need to fund its net spending. The Government is not like a household - households like my household, if we want to spend we have to find a source of revenue, we are revenue constrained. The federal Government is not revenue constrained, it issues the currency," he said.

"When the Government does issue debt, it provides us with a safe haven for our savings. The debt repayments and the debt servicing the Government makes provides us with income and allows us to earn income from our savings in a risk free way," he said.

"It's something that superannuation funds can invest in much more securely than some of the more high risk assets."

There are fallacies abound in the above comments, so let's start from the top. I don't think Prof Mitchell is advocating a return to the printing press, although if he is, any ounce of respect I may have had for him would be completely gone...I think he's stating that because that option is there, and the government takes a constant stream of taxes from its people, it never needs to back its debt with real, productive revenue (a good thing too, because government has no revenue of its own merits!). It's this argument, and that government issued debt is a safe haven for savings, that I will address.

Let me begin by saying that government debt, contrary to what Prof Mitchell says, has no upside. In order for government bonds, required to finance debt (I ruled out the printing press), to sell, the government has to make them attractive. To raise $60bn in capital, as an example, the government is going to have to issue, say, 630 million bonds, each with a face value of $100, paying 5% interest over the course of a year (each bond would then fetch $95.24 from a capitalist, and $95.24 x 630 million = $60 billion). Each year the government has to redeem the maturing notes for $100 and reissue the bonds - thereby losing money ($3bn a year), unless they either issue more bonds next year or finance the interest payments as another way to recover the loss.

To summarise,

YEAR 1: 630m bonds * 95.24 = $60bn revenue for government

YEAR 2: 630m bonds * 100.00 = $63bn back to the investors

NET LOSS FOR GOVERNMENT = $3bn

The problem, of course, is that for this debt to be paid off (and for the cycle to end - issuing more and more bonds can't go on forever), it is necessary for the government to tax the general public to repay its commitments. Each government bond therefore represents a future claim on taxpayers. While a select few might benefit - perhaps the superannuation funds that Prof Mitchell mentions - it's at the expense of someone else (people who Prof Mitchell fails to see), as the money to pay for the interest comes directly from the taxpayers. The only other option, of course, is for the RBA to buy up the bonds and monetise the debt - thereby causing inflation, which is another form of tax (and punishes the poor, the very people the government is claiming to be help with their deficit).

What Prof Mitchell fails to grasp is that whenever the government buys something, it consumes resources that might have been devoted to other ends, and in particular might have been devoted to the production of capital goods. It can never give more than it takes. Government debt will almost certainly reduce the amount of gross investment, and hence production in future decades will be lower than it otherwise would have been. This cannot be offset by pieces of paper issued by the Treasury.

Associate Professor Steve Keen

Despite his good intentions and sound knowledge of economic history, Steve Keen's fanatical attacks on debt and the "roving cavaliers" (bankers) leave him blinded to the very tools that enable them: the central bank and government. His recent popularity makes him the most dangerous of all of these "economists", because while he called the crisis correctly, his misunderstanding of the real cause and his unwavering obsession with Minsky is likely to lead us into more trouble than the well-known fallacies of the previous two "experts". He says:

"We have had far too much debt, more than the system can actually cope with, we therefore can't get out of this the way we used to get out of it by re-encouraging private lending once more," he said.

"People who got a thousand dollars through a tax cut, used that thousand bucks to borrow ten thousand dollars to speculate on real estate and margin loans," he said.

"The reason we had a boom at the same time as running gigantic surpluses was because the private sector was running up enormous amounts of debt, spending it, and then giving us a paper economy that looked pretty good for a while."

"Ultimately, we're going to see governments changing across either to abolishing debt, or to literally printing money rather than running out debt to finance their spending," he said.

"We know this crisis was caused by too much debt, how on earth do we think that getting into more debt is going to solve the problem."

"The financial system has broken the capitalist system, and I'd rather break the financial system in return and start building capitalism all over again, than leave us in the debt trap we've ended up in."

Most of what Steve Keen said is true, to an extent. Before beginning to critique him, I'm going to clarify something: the article I sourced this from by Michael Janda adds the following paragraph before the direct quotes, which I have a feeling misunderstands what Mr Keen is saying:

"He advocates a drastic solution to the debt problem - that is for the Government to get rid of the debt by causing higher inflation or by simply cancelling it and nationalising the banking system."

Nowhere in what Mr Keen said does he "advocate" those solutions - he merely states that they're the likely outcome. Based on that, I'm hesitant to criticise him for something he may not be advocating, so instead I'm simply going to focus on what he has said, not what Mr Janda thinks he said.

Steve Keen believes that private banking is the source of instability, rather than central banking. He considers an unstable banking system a normal feature - and, it seems, almost a necessary feature - of a dynamic capitalist economy. The 'necessary' part, however, is given without any real argument. Just because banks can create unbacked credit, it doesn't mean it's a flaw of the free market: what enables this to occur without a bank run? Quite simply, the existence of a central bank allows private banks to expand credit (debt) to a much higher level than the free market would permit, preventing the efficient functioning of capitalism.

In a free-market economy, intermediaries such as banks have difficulty expanding unbacked credit, because if a particular bank engages in an unbacked expansion of credit this bank runs the risk of being "caught" (a bank run). Consequently, the threat of bankruptcy is likely to deter banks from pursuing the expansion of unbacked credit. As such, it's unlikely that there's an inherent tendency in the capitalistic economy to generate unbacked credit that destabilises the economy.

This is the problem with Steve Keen - the framework he follows, that of Minsky and Marx, may help him to describe what went wrong (excessive debt, etc), but it doesn't explain. It arbitrarily puts the blame for instability on the capitalistic economy without even making the slightest attempt to establish a logical verification for this claim. Thus, Mr Keen's recommendations - the movement away from laissez faire towards bigger government - are incorrect and unfounded. His suggestions are merely a recipe for progressively slowing the accumulation of real wealth and hence lowering the living standards of all Australians. This is why Steve Keen and his followers are dangerous (apologies for not sticking entirely to the comments made in the above article, part of this critique is based on prior readings of Mr. Keen).

The article finally concludes with:

"Given the long-term nature of the debt commitments Australia is entering, it will be years, and maybe more than a decade, before economic historians can look back and continue arguing which view was right."

Historians can argue all they want: there are still some poor deluded souls who think that the "New Deal" got America out of the great depression, and likewise there will be people who will point to the government when we get out of this one. But the fact of the matter is, government intervention caused this crisis, indeed it has caused almost all of the boom-bust cycles throughout history, and attempts by the government to restore prosperity will only achieve the opposite: to delay recovery and, in the worst case, further impoverish us all.

To conclude, the state of economics in Australia is a disgrace. Not only have most never heard of the Austrian school, although this isn't their own fault: they're indoctrinated throughout the education system to believe that Keynes can fix our woes; that the free-market is inherently unstable; that "greed" is evil, but the very suggestion that government may not be the solution to all of our problems is met with immediate hand-waving, accusations of being "anti-Australian", or "fanatical", or a "capitalist pig". They're so occupied with attacks against each other - left and right - that they can't even comprehend the idea of freedom and liberty, they've never even questioned the very system itself! What is it about the concept of "free to choose" that is so hard to grasp? Why is it always assumed that there's some personal gain to be had; some motive behind the fight for protecting individual freedoms other than the very principle in its own right, regardless of the situation? For example, when defending the rights of individuals to smoke, you're labelled as "irresponsible", or a supporter of the "evil tobacco companies". On the flip side of the coin, when arguing against government spending on a project, let's use the example of an art exhibition, any economist who objects is accused of disapproving of the project itself rather than just disapproving of the government support; you're accused of being "anti-art"! The result is the label of anti-every kind of activity, when on the contrary all we're asking is for those activities to be free and to seek their own reward: to justify their own existence without coercion. Just because something isn't supported or regulated by the government, doesn't mean it should cease to exist - if the people really want an art exhibition, and I'm inclined to believe some would, they will go about achieving that gratification. All government involvement does is displace enjoyment, displace labour, displace gratification, displace resources, and displace wealth - usually for the purpose of preserving its own existence, an existence dependent on the work of others (and their votes!).

The Howard government squandered a unique opportunity: rather than reducing the role of government in our lives, he used his power to expand spending, become involved in pointless wars that put Australia on the terror map, vastly increase regulatory power, and stole freedoms and liberties from every Australian, all under the watchful eyes and support of his legion of "economists".

This laid the perfect platform for Rudd and the Labor left to further expand and destroy the economy and individual freedoms. The struggle between right and left is futile; both are a vote for the same thing, the same system, the only difference being where the resources are taken from and to which politically-connected interest groups they're distributed to. I'm asking for a change, for some form of decency in Australia; a consideration of freedom and liberty, a shift away from the reliance on government and a move to sound economics.

Analysing and critiquing the entire budget would require a significant time investment and a substantially long piece of work. Unfortunately, as a ‘wealth-producing' member of society, I don't have the time to do that (unlike the government, who employ thousands of staff to compile this extravagant, multiple-hundred page document with someone else's money). So instead, I'm just going to look at the key points (namely, what the Treasurer mentioned in his speech).

Before I get started, lets just quickly touch on how the government plans to pay for most of this, as Mr. Swan claims that "...every single cent of new spending for the coming year has been more than met by savings elsewhere in the Budget." However, he also mentioned that he's going to sell $60bn worth of government bonds - that's not savings, but it is a good sign that they plan to monetise the debt through inflation in the future (the RBA will have to either print to buy the bonds or to keep interest rates at the 'target' level). By issuing bonds and paying an above-market "safe" return (otherwise no one would buy them), it starves the market of private capital and credit; it means that increasingly, private savings are being siphoned away from productive investments and into wasteful and counter-productive government expenditures. These bonds represent nothing more than credit extended to companies and projects that are proven market failures. Creating these bonds is a way of institutionalising the principle of buying low and selling lower, all "backed" by future tax and inflation.

Enough of that though, let's get to the budget.

The Working Families Support Package
Mr. Swan announced $55 billion dollars to support so-called "working families...[who] demand little more than a fair go". This is in the form of tax initiatives, child care, education, housing, and other "essential" components of family budgets.

Tax Cuts
Apparently the proceeds of the boom were "skewed" to those already "doing well" and that the people "doing well" weren't paying their fair share. "Fair" is a key component stressed throughout the budget - indeed it's mentioned six times in this relatively short speech. But what is fair? The common definition of fair is:

"...free from favouritism or self-interest or bias or deception."

To me, Mr. Swan's version of "fair" sounds like the usual lie perpetuated by governments of both sides (left & right) to distribute income to whoever they're more "fair" towards. Indeed, when you look at the facts, the tax burden isn't fair at all![1]

A more recent report by the Treasury[2] shows that the bottom 20% of taxpayers account for 6.5% of taxable income but only 2% of tax paid, while the top 20% accounted for 45% of taxable income and 59% of tax paid! Looking at the above table, it's also clear that most of the tax benefits go to the so called "working families". Sorry Mr. Treasurer, but they're asking for much more than a "fair go".

Whenever the government takes tax money and doles it out to someone other than the person who paid the tax, it becomes no different from a common thief. And even if it does dole the money out to the person it took it from - then what's the point of taking it in the first place? It becomes a legitimate exchange, a role the private sector is more than capable of performing. It's utter nonsense to say that the government will spend tax money for the "wealth" of our nation; the common thief would do the same, as would the person it was taken from had he not been stripped of his wealth by the government. If this is nothing more than welfare, then simply state as much. But please don't cloud it with false economics, as if somehow the "...backbone of our economy" is a class that gives more than it takes (it is, but it's not the class Mr. Swan thinks it is!).

Child care costs
The government plans to "...ease the burden of child care costs". Everyone who has a child (assuming they fit into the "backbone" category) gets a $7,500 payment along with a 50% child care rebate, for a total cost of $1.6 billion over four years. Again, this is nothing more than welfare. Not only that, but it also has far more severe consequence: it will obscure incentives and reward poor people who have children. Rather than giving people a "fair go" and lowering the tax they pay, it's giving them more money than they even pay in tax (they can actually make a profit off of another tax payer)!

This is a policy that rewards childbirth, warps the marketplace and blurs economic reality for parents, resulting in a perverse outcome: more children born into poor families. It will serve to increase the welfare state we live in, but also boost the pool of future voters for the Labor party. I can really see how this is going to help the economy.

Education costs
So to help all of the families that were lured into having more babies, the government is also going to educate them in the ways of the state. For a meagre $4.4 billion over four years, and further taxes for the top 20% of income earners (paying the majority of taxes already obviously isn't "fair" enough!), "...eligible parents will be able to claim a 50 per cent refund on eligible education expenses for children undertaking primary or secondary school studies - up to $375 for a primary schooler and up to $750 for a secondary school child each year". So not only is it cheaper for poor people to have more children, it's cheaper for them to provide for them as they get older. No doubt this army of children (the new welfare class?) will grow up to be ardent supporters of government, because they "owe them" so much for "helping" them throughout the years.

Improving housing affordability
We're now "helping" the very same people all the other spending promises are "helping" by providing affordable housing, at a cost of $2.2 billion dollars. If the government was really interested in helping the welfare class, they could start by ceasing their debasement of the dollar, the hidden tax on the poor that makes it very difficult to get away from the trough. It's much easier to become productive and achieve wealth when the target isn't constantly moving away from you. Likewise, artificial credit expansion only raises the price of houses - along with all of these grants that are supposed to "help" the poor. They're nothing more than a subsidy to the building and construction industries!

Supporting older Australians and carers
Welfare for the elderly-at least Mr. Swan doesn't hide this under the guise of economics. But who's going to complain about more money for the elderly and carers? Unfortunately, the presence of the state in retirement security creates calculational confusion, resource misallocation and mismanagement along with harmful free riding. The real cost of this will be borne by future taxpayers, who are paying for the pensions of the present retirees but can expect to receive little in return. If the government really cared, they'd remove forced retirement and let individuals and families make rational and responsible decisions that enable them to provide for their old-age needs. A good start, as above, would be to cease immediately the debasement of the currency so that people would be more able to calculate how much in the form of savings they would actually need to retire on.

Easing cost of living pressures
More powers for the ACCC as people are worried about "...the cost of essential goods such as groceries and petrol". Nothing to see here - a simple justification for government expansion on the basis of a government created problem (again, the debasement of the currency results in higher prices: it's the low-income people who struggle to keep up with government-sponsored inflation).

NEW ERA OF RESPONSIBLE ECONOMIC MANAGEMENT
Mr. Swan is claims he's going to be responsible, yet just released a budget deficit that's going to take 20 years to repay. Apparently, he's simply redirecting spending to "...more pressing priorities". It's the fall in revenues that's to blame, not the increase in spending. Of course! We need these services! The government always knows where to best allocate other people's resources for their own good (you see, people can't be trusted to make decisions for themselves). The most bamboozling quote of all is this one,

"Mr Speaker, some Australians have been asked to bear a greater burden than others, that's true. But in the end, if we're to beat inflation and build prosperity, we have no choice. We simply cannot go on as before, spending irresponsibly, and allowing inflation to build."

I'm not quite sure what Mr. Swan is trying to say here. Inflation is purely a government phenomenon. It's caused by the inflating of the money supply: I can't print dollars, my neighbour sure can't, and other countries can't. If he was serious about stopping inflation, why not return to sound money and cease debasing the currency? I agree about ceasing government spending, but this budget is the highest spending budget in our history. Mr. Swan is trying to have his cake and eat it too: he's contradicting himself.

MEETING OUR COMMITMENTS
For one, only half of Australian's voted for you Mr. Swan. Where was the "none of the above" option, where I'm able to opt out of paying tax and also opt out of all of your "help"? He continues with "...we will begin tackling the big challenges on Australia's horizon, by providing long-term plans, not short-term bandaid fixes." Translation: we're going to plunge the country into long-term debt and wealth destruction, big government, and a removal of individual freedoms, rather than let the market fix itself (which would likely happen in the short-term!).

Education Revolution
The education promise is $5.9 billion dollars over five years to increase the skills of our workforce. How, again, does Mr. Swan know what skills our workforce needs? In plainer words, how is it possible for bureaucrats, so disconnected from the real world, to know what the market demands more than the market itself? Surely entrepreneurs would be better placed to determine the type of workers they need and invest in their education and training accordingly. The education industry in this country is a government-protected monopoly that forcibly restricts competition and needs to end.

Better hospitals and health services
By pumping yet more money into a health system that's riddled with free rider and moral hazard issues is not the solution to our health woes. If people had to bear the costs of their own decisions - whether through insurance, savings, or charity - they would likely be far more responsible with their own wellbeing (by the way, "insurance" isn't the perverted system we have now. Only government could be so deluded to think that planned, optional procedures should be covered by insurance). Rather than piss away more billions on "educating the people", give them some responsibility back!

Tackling climate change
We're getting more funding for "green" alternatives. One can only wonder how far we'd already be down this road if governments removed their subsidies on "dirty" energy and people had to pay the appropriate price for these products. It's always a good laugh when government-run energy companies plead on prime-time television for people to cut back on their electricity usage. It's the perfect example of why government can't be in business and shouldn't be providing services - they have no idea how the price system works! Can you imagine if McDonalds started advertising, telling people to stop consuming so many burgers?

Supporting business
I'm sorry, but if you want to "support" business, remove all taxes and regulations (and no, I don't want quasi-deregulation, which can cause far more problems than it prevents).

Regional and Rural Australia
Mr. Swan here provides more welfare for "rural" Australians, who choose to live there of their own free will, yet constantly plead for aid (out of someone else's pocket). One thing to note is the funding for "water for the future", which brings "...a comprehensive and coordinated approach to water supplies". Only when the government manages a resource, such as water, are we faced with shortages. If the market, the pricing system, was allowed to work, there would be far less squandering of this precious resource than exists today. As per the above example, the government is an organisation who actually advertises - even forces people in the form of water restrictions - to not use their product! Ridiculous!

Indigenous Australia
More welfare for the indigenous, like they need any more "help" from the government. Welfare only increases their dependence on the teet of the state. Welfare is a key cause of unemployment. If they would level the playing field (by ceasing any and all involvement), there wouldn't be any need to supply a continuous stream of "aid" to this cause.

National security
Mr. Swan promises more funding for the military and mentions part of our overseas network. Obviously the Labor party is no different to the Liberals in foreign policy - both seem to be heavy advocates of cooperating with the U.S.'s "empire building" policy, as much as they try to disguise it otherwise.

INVESTING IN THE FUTURE

"Mr Speaker, this is a Government of nation builders.

We have no intention of hoarding the strong surplus for its own sake. This money is not ours, it belongs to the Australian people."

How correct he is (on the latter part). The only problem, of course, is his government isn't giving any of it back to the people it was taken from. On to the more pertinent issue of "nation building", our infrastructure may or may not be lacking, but why is the government best placed to decide where investments should be made? Why should we hand over more power and money to the government, further entrenching government employees in their overpaid, underworked jobs? We don't need more government involvement, we need less. Government lacks the incentive to fix problems, especially in infrastructure. Even with incentives, there's the calculation problem associated with allocating the use of resources, as I mentioned earlier with water and electricity shortages. Private markets, on the other hand, excel in this area. Whilst they may not be perfect, resources are used efficiently to solve the most urgent demands as revealed in the system of profit and loss. As the government lacks this mechanism, everything becomes arbitrary at best and political at worst.

Building Australia Fund
See above, $20 billion dollars for "critical" infrastructure that the government can't possibly know is critical. At best they can have a guess (surveys and so on?), but without the price mechanism, it's impossible to know what people really want.

Health and Hospitals Fund
Mr. Swan pledges an initial $10 billion dollars on hospitals, equipment and so on. Please see the free rider and moral hazard issues above. "Free" healthcare is not only not free, but it can't work (well).

Education Investment Fund
You wouldn't be far off if you thought these sums were from some kind of fantasy land, because there's over $17 billion going into education. But when money grows on trees (or you can print it), who cares, more for all! See above (Education Revolution).

COAG Reform Fund
$78.6 billion for the states (I love how he includes the .6 - what's $6,000,000 when you're talking in billions and it's not your money anyway?). I wonder what strings are attached to this payment...

Future Fund
$3.9 billion dollars for retired public servants - not only have they done nothing productive throughout their lives, living off the fruits of the private sector, but they haven't even provided for themselves in retirement (although to be fair there was no incentive to - the government does promise to take care of them!).

Australia's Future Tax System
This is the scary part because it's so vague: we need something that "builds the nation"; one that's "fairer"; "respects the environment and demographic challenges"; makes us "internationally competitive"; and "creates incentives to invest in our productive capacity". One would think, reading that, that Mr. Swan was advocating for the removal of the tax system, such is his play on words! It's clear that our leaders are floating off in some mystical utopia, because as long as the system stays in its current form or goes the way Mr. Swan wants - towards big government - it's unlikely any of the above will be achieved.

CONCLUSION
Despite all of the big talk, behind the smoke screens Mr. Swan has carefully laid out, at the end of the day the government has plunged the nation into major debt that is going to take considerable amount of time to repay, all on the back of fear mongering tactics and economic fallacies (see the issue with "jobs" in the previous post).

The money for deficit spending has to come from somewhere. It either comes from taking on more debt, printing the difference, raising taxes, or some combination. When the government takes on more debt, it raises interest rates for private borrowers, thereby hurting the economy. As the RBA fixes interest rates (at present, probably too low), it will have to print money, resulting in inflation that takes real value away from the private sector. Finally, if the government raises taxes to pay for the deficit in the future, then it again takes from the private sector. Regardless of how it funds the deficit, the government will crowd out private investment and redistribute or even destroy wealth, thereby slowing economic recovery.

No matter how much Mr. Swan will assure you to the contrary, the world will not come to an end if government "does nothing". Indeed, we'd probably all be better off. The real motive behind sinking us into debt is the love for higher taxes and for higher government spending for their own sake, or, rather, for the sake of expanding statism and collectivism as contrasted with the private sector. It's hardly a very cleverly hidden agenda but for some reason most people still can't grasp it. And no, I doubt the Liberals would be any better.

---

[1] Ann Harding and Neil Warren, "WHO PAYS THE TAX BURDEN IN AUSTRALIA? ESTIMATES FOR 1996-97" Discussion Paper no. 39, February 1999

[2] http://taxreview.treasury.gov.au/content/Paper.aspx?doc=html/publications/papers/report/section_3-03.htm

Mr. Rudd states that:

"Treasury's advice to be published in the Budget tomorrow is that the measures that we have put in place will support Australian jobs and significantly reduce the length of the Australian unemployment queues," he said.

"This Treasury advice finds that if the Government had done nothing national unemployment in Australia would have been forecast to reach 10 per cent."

He might be right. We might have had more job losses in certain areas of the economy; it's impossible to attach a figure to this (the Treasury wizards can guess all they like - I recall them saying in 2006 that this boom was going to stay strong for 'many decades to come'). But are job losses necessarily a bad thing? The whole reason the world is going through this recession is because there are fundamental structural problems throughout the world economy. There are resource misallocations, misallocations caused by irresponsible monetary and fiscal policy that need to be fixed. Any attempt to prop up prices, or jobs, by injecting capital into areas of said misallocation is a bad idea. It prevents the market's corrective mechanisms from working; it destroys yet more wealth even after the errors of the bubble have been revealed. Hasn't anyone ever told the people in charge that throwing good money after bad is never a smart thing to do? I suppose if your job involves spending the fruits of other people's labour, with no personal repercussions, then it doesn't matter how much you squander, especially if it wins you votes.

But let's not skirt around the issue: this was never a matter of economics. Our leaders may be very well aware of the fallacies of "stimulus" (although this author is sceptic) and are only pushing these plans for political considerations; in that case, it's an attempt to prop up pet industries (infrastructure comes to mind) and increase the size and power of government (i.e. them). Assuming, as we are told, these expenditures are temporary, what happens when the resources shift out of these areas? There's no way for the government to know where consumer, saver and investor preferences lie and therefore they have no idea whether they will survive in the long run. As I've said before, if these projects actually had merits, they wouldn't need to justify them with moral or sentimental reasoning. Simple accounting would be sufficient!

As Mr. Swan keeps telling us, "...tonight's Budget is about three things - jobs, nation-building and a path back to surplus". To look further at the issue of jobs, we need to ask the question: is it that hard to create employment? Keynes suggested we should bury old bottles with money in them, cover them with garbage, then let ordinary incentives get people out there digging. But this misses a fundamental point: employment is not a goal in itself. Wealth, value and production are the goals. Stimulus may create jobs, but it's likely a net destroyer of wealth.

Can government spending attract resources that are currently unemployed? Given that most of the labour force is currently employed, and that leisure does have a value, it's doubtful. More likely, it will simply divert resources (capital, labour) and increase the cost of capital and labour for the private sector, preventing them from expanding and creating jobs themselves.

Arguably the largest issue with stimulus and deficit spending is the debt created to finance it. Either higher taxes in the future or inflation (through the monetising of the debt) are required. In either case, future wealth will be lost as productive activities are penalised. Will the wealth created today, if any, be worth the cost of future losses in wealth? I highly doubt it.

So if massive stimulus packages and "nation building" investments aren't the way to get ourselves out of this mess, what is? The first thing to keep in mind is that spending that prevents or inhibits the reallocation of resources from areas of malinvestment will only prolong the current recession. Not only is this type of spending not better than nothing, it's far worse than nothing.

We need to allow market adjustments to take place. Prices and wages need to be allowed to realign; only when this happens will economic activity resume and will wealth again be created (of course, if other factors: productivity, technology and so on, somehow manage to increase at a greater rate than that of government wealth-destruction, it is possible to achieve a net gain in wealth in spite of the gross government waste).

Government should also be reducing tax to reduce the demand to hold money and increase the desire to lend, borrow, invest, and consume (notice that tax cuts aren't directed by the whim of a bureaucrat: private individuals are able to allocate resources in line with their own, voluntary, preferences, making them more likely to be sustainable).

However, it's important to realise that a cut in tax must be followed by a cut in government spending. Otherwise there will simply be tax increases or inflation in the future to pay for the tax cuts today. In other words, any cuts must be sustainable.

Finally, it's critical that we overcome the fallacy of "jobs" and instead focus on what matters: wealth. A jump in job data does not necessarily equate to an increase in standards of living; let's not forget that some of the poorest places in the world have close to "full employment". Stimulus and grandeur spending promises are nothing but a recipe for wealth destruction. With wealth creation, jobs will follow and prosperity is increase for everyone. With a focus on jobs, it's unlikely that wealth will follow. Indeed, we're more likely to see "trickle up poverty" than "trickle down wealth". Contrary to what they tell us, the free market, or a focus on wealth, is a plan for the people; a focus on jobs, or big government, is a plan for the politicians and wealth destruction. The free market had nothing to do with this crisis: interference in the market by government, the refusal to allow production and consumption to coordinate, is what caused this mess. More of the same will not restore prosperity, it will only destroy it. Blaming 'greed' is akin to blaming gravity for airplane crashes.

Tonight's budget should go down in history as one of the most irresponsible acts ever committed by an Australian government. Deficit spending of $60 billion dollars, or almost 10% of our GDP, will be a burden we're going to have to bear for decades. Unfortunately I fear that the propaganda machine, already in full gear, will distort public opinion to the contrary. The budget will go down as our "saviour", and the old Keynesian mantra of "imagine how bad it would have been if we did nothing" will be utilised to it's full extent. It's a rigged debate that the market can't win.